Stuff is reporting that Strath Taieri Community Board chairman Barry Williams called a Strath Taieri Hotel worker a "stupid black b****" after they mixed up a food order.
The information comes from a letter that was sent to the Dunedin City Council and leaked to Stuff, and which says Mr Williams used the slur more than once.
“We feel that a man of this calibre is not in a position to lead the town” the letter also said.
The news comes after Dunedin Mayor Jules Radich initially appeared to play down the incident, calling it "a relatively minor thing".
Mr Radich has since apologised "for creating a misconception I was trying to trivialise it".
"It was definitely a racial slur and I do not seek to minimise it."
The incident, and the departure of the worker, has left the community divided, some residents say.
They were saddened by the victim’s departure and the victim’s lasting memory of the town did not reflect what Middlemarch stood for, they said.
"For whatever reason this person has decided to leave. It is nevertheless sad that will be a memory that person will have of Middlemarch, probably forever.
"That’s a bad, bad memory to take with you."
The resident, who had spoken to the victim, said she was leaving but did not specify why.
Middlemarch resident and film editor Shane Loader said there needed to be more clarity about Mr Williams’ comments.
He said the comments were part of an ongoing pattern of behaviour from Mr Williams which was "dividing the community unnecessarily".
"Where there’s a vacuum, rumour and innuendo start happening.
"Things just need to be out in the open ... Silence has power, too," Mr Loader said.
He thought Mr Williams should resign as chairman, he said.
When approached by the ODT about his comments, Mr Williams declined to comment.
In a post on its Facebook page, an unnamed representative of the Strath Taieri Community Board said the code of conduct process was outside the ambit of the board, and the Dunedin City Council had initiated and managed the process.
However, the Local Government New Zealand good governance guide for community boards makes clear community board chairs can be replaced should a majority of its members decide.