William was taken on by Racing at the end of 2015 in a public relations role for club owner Jacky Lorenzetti's wine company.
Williams, 35, a World Cup winner with New Zealand in 2011, was taken on by Racing at the end of 2015 in a public relations role for club owner Jacky Lorenzetti's wine company and as a media adviser to star fly-half Dan Carter.
He relaced his boots this year to help ease a second-row shortage at the Parisian club.
But speaking at a press conference ahead of Saturday's Top 14 game at Grenoble, Racing forwards coach Laurent Travers said that Williams "is no longer an ambassador of the club".
Williams later took to Twitter to apologise for the incident.
"I made a big mistake and I’m sorry. I feel I've let down our beloved rugby community. I will face the consequences. Thanks 4 all the support," he tweeted.
French police on Sunday charged Williams with buying cocaine and Toulon's Australian international James O'Connor with possession of the drug.
The pair were arrested in the early hours of Saturday outside a nightclub near the Champs Elysees in possession of 2.4 grams (0.08 ounces) of the substance.
Travers said that Williams was "very well integrated and doing what was necessary for the whole of the club".
But he had committed "an inexcusable error", he added.
The incident is the latest to plague Racing in what has been a testing season after their victory in the French league last year.
"We've had a raft of them and I hope that's it," said Travers.
Most recently, two-time World Cup winner Carter, long regarded as the most marketable athlete in New Zealand, was caught drink-driving in Paris. He is also involved in an ongoing probe into the use of drugs.
After his man-of-the-match performance in the Top 14 final in June, the sport's record international scorer with 1,598 points in 112 games tested positive for corticosteroids, along with fellow former All Black Joe Rokocoko and Argentine winger Juan Imhoff.
All three Racing players and the club were later cleared of any wrongdoing by a French Rugby Federation medical commission. But the players have now been summoned to appear before the French Anti-Doping Agency (AFLD).
Racing have also had to contend with last season's Top 14 player of the year Johan Goosen quitting to go back to South Africa, and Brice Dulin and Yannick Nyanga testing positive for the banned substance higenamine.
Travers insinuated that Racing, seventh in the league and 13 points adrift of leaders Clermont, were more exposed than other clubs to media scrutiny.
"We know that in other sports or even Top 14 teams, things go on and nothing's written about it," he said.