Function key is not working

Try Safe mode, check/test if you have same issue there?

How to use safe mode on your Mac - Apple Support

Note: Safe mode prevents your Mac from loading certain software as it starts up, including login items, system extensions not required by macOS, and fonts not installed by macOS. It also does a basic check of your startup disk, similar to using First Aid in Disk Utility. And it deletes some system caches, including font caches and the kernel cache, which are automatically created again as needed.

I'm having the exact same problem with a new Magic Keyboard paired to my iMac (Retina 5K, 27-inch, Late 2014).I also tried safe mode with no change. I might have to send this back and get a non-Apple keyboard.