The Circle of Sadness is a trick Joy used to convince Sadness to stay out of her way.
On Riley's first day of school, Joy gave each emotion a special job to perform that day. In order to not leave Sadnes out of having a special job, she drew a chalk circle on the floor of Headquarters for Sadness to stand in. Joy named the circle the Circle of Sadness and explained that the job would be to "make sure all the Sadness stays inside." Although Sadness had felt pleased and honored to be receiving a special job, when she realized Joy's intention, the joy (no pun intended) was wiped away. Sadness asked for confirmation of Joy's intentions ("So, you want me to just stand here."), and after hearing the dodgy response she accepted the position.
The reason why Joy wanted Sadness to stay in it was because she didn't see any reason for Riley Andersen to be sad, or any reason to use Sadness at all in her plan for a perfect, happy day. The only boring job she could think of, unloading cargo, had been given to Anger a few moments prior. Joy decided it was best to put her out of the way.