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The loose forward is facing allegations of assaulting a woman at an Octagon bar last weekend.
He was alleged to have been involved in an incident at Vault 21 but he has not been charged.
Highlanders Chief Executive Roger Clark said the investigation involving Frizell was a "distraction" for the team but his omission was not punitive.
"I think it is important for us all to remember at this time, these are all allegations and no charges have been laid," Clark said.
"However, these have been a distraction for the player, and the team. And in the best interests of everyone concerned, we are going to omit Shannon from the team this week."
The 27-year-old Frizell made his All Blacks debut in 2018 and has played 13 tests.
The blindside flanker started in four of the All Blacks' five tests last year and is expected to be a part of Ian Foster's squad this season.
Clark said the Highlanders had completed their own investigation into the incident and had left the issue with police. He added he would be "surprised" if police laid charges on Frizell.
"That is just based on what I know. So it is a personal opinion," he said.
The Highlanders' culture has been under the microscope following a string of off-field incidents over the past year.
Coach Tony Brown dropped six players for breaking team protocols in March.
The Highlanders apologised for "anti-social behaviour" last year after reports of wild partying at a holiday apartment complex in Queenstown that triggered complaints from guests and saw police called in to investigate.
"For me, the challenge is making sure they are preparing themselves professionally and don't put themselves in a compromising position," Clark said.
The team have made several changes to the XV that played in the last round of Super Rugby Aotearoa. Frizell has been replaced by Hugh Renton at No 6, while lock Pari Pari Parkinson returns from injury.
In the backs, Michael Collins comes into the centre position pushing Patelesio Tomkinson out to the right wing and Sam Gilbert to fullback.
A strong bench includes Ethan De Groot, Bryn Evans and Tasman injury replacement first five-eighth, Tim O’Malley.
The match is the Highlanders’ first against Australian opposition since February 28 last year, when they played the Rebels at home.
Highlanders v Reds, 7.05pm, Friday 14 May, Forsyth Barr Stadium
Ayden Johnstone, Ash Dixon (cc), Siate Tokolahi, Pari Pari Parkinson, Josh Dickson, Hugh Renton, Billy Harmon, Kazuki Himeno, Aaron Smith (cc), Mitch Hunt, Jona Nareki, Scott Gregory, Michael Collins, Patelesio Tomkinson, Sam Gilbert. Reserves: Liam Coltman, Ethan De Groot, Josh Hohneck, Bryn Evans, James Lentjes, Kayne Hammington, Tim O’Malley, Ngatugnane Punivai.
Daniel Lienert-Brown (arm), Josh Ioane (leg), Jeff Thwaites (leg) were unavailable due to injury.
- additional reporting ODT Online