Do bees have knees?
Like all insects, bees do have knees. Speaking anthropomorphically, the joint between the femur (thigh) and tibia (shin) of an insect's leg is its knee. They don't, however, have kneecaps.
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Why do we say 'bees knees'?
However the origin of the phrase 'bees knees' is rather unclear. Used in the 18th century to refer to something very small, its present meaning of something marvellous might be a reference to 1920s dancer Bee Jackson's active knees when she popularised the Charleston, or to the goodness of the pollen load carried on a bee's back legs.
It may also just be fun nonsense, like the expression 'the cat's pyjamas. To me, though, it seems to be a corruption of 'the business'.