There are a number of threads already discussing the Relevant Person concept, and any fire starting in the pub can affect the people sleeping above (the Responsible Person is also a Relevant Person) therefore i would expect to find either suitable means of detecting and warning of a fire and a suitably protected means of escape, or good (1hr) fire separation and a separate means of access/egress.
If the accommodation is accessed via the pub, typically the back of the bar, the risk to those above increases dramatically, and there may be a case for prohibiting one or other of the uses (commercial or sleeping), but again we come back to the terms of lease.
One method i use is to find out what happens to the takings. If they go into your pal's bank account and he then pays the brewery, then he may not be an employee, and therefore the upstairs is a domestic premises. If, on the other hand, the money goes into the brewery bank account, and he then draws a wage, he is an employee, and if required to sleep on the premises as part of the lease, then i would consider the RRO to apply upstairs as well.