The Latics did not win any of their eight games under Royle, who was in charge of the club from 1982 to 1994 and led them to the Premier League.
Alan Hardy, the club's chief executive, said Royle would step down from his role after Saturday's game at Walsall.
"When Joe kindly agreed to help us out six weeks ago it was always with just the last nine games of the season in mind, and at that stage a longer arrangement was never considered," he said.
"After openly discussing the situation with the owners and myself, Joe felt that the best option for the club to take was to look for a younger man to take the helm.
"However, Joe has agreed to continue to help but without the day-to-day involvement. This arrangement suits both parties at the present time."