You are a boss and a friend of an employee. I have found, from experience that it is difficult to remain objective and it is also hard to identify the lack of objectivity in oneself when this happens. I believe the mixing of business with pleasure can be complicated and tricky. It is a professional standard, for many corporations and professions that management not mingle with staff outside of work. I personally think a person, in your position of authority, has the potential of setting themselves up with real or imagined scenarios that can be career ruining. You are in a position of authority according to the law.
If you review many of the lawsuits brought against businesses, you will find that the trouble began in circumstances very innocent. Whether you like it or not, there is the potential for an employee to say that they went along with everything because you were their boss (ie…facilitator) and they felt that they would lose their job if they didn't. For example, during one of your after work adventures with your employees, one of the employees comes on to you or worse yet, accuses you of coming on to her or him. It may have been an innocent hug, hand on the shoulder, or kind comment taken wrong. You may have not treated this employee (i.e. friend) any different than you treated the others. Another example, discrimination claims, employee states they did not get as large of a raise or were not treated the same because they do not want to be part of the big happy family and do activities outside of work with their co-workers and especially with their boss.
It does not matter if it is true or not, the practice will spend thousands defending their position of innocence. Who will be at the heart of the debate? How many tens/hundreds of thousands will it take to make this person go away? How much damage will it do to the practices reputation in the process?
So being “good friends” with workers and supervising them can be tricky at best. However if done correctly it can create a great working atmosphere. The problem is most managers aren’t successful at this. So be aware.