This paper presents in‐depth qualitative research on three small professional service firms whose owner‐managers sought to introduce greater degrees of formality in their firms’ working practices and employment relationships. We focus on humour as an ambiguous medium of informality, yet viewed by owner‐managers as a tool at their disposal. However, while early studies of humour in small and medium‐sized enterprises support such a functionalist view, our findings indicate its significant limitations. We argue that humour obscures but does not resolve disjunctive interests and it remains stubbornly ambiguous and resistant to attempts to functionalize it. Our findings contribute to studies of humour in small and medium‐sized enterprises by challenging its utility as a means of managerial control or employee resistance. They also contribute to studies of employment relationships by exploring humour's potentially disruptive influence within the formality–informality span, especially as small and medium‐sized enterprises seek greater degrees of formalization, with implications for how those relationships are conducted and (re)negotiated on an ongoing basis.