Freel, 33, was obtained from the Chicago Cubs on Monday with cash in deal for a player to be named. Freel was in the starting lineup in center field on Tuesday night against the Tigers.
Hernandez, 25 and a switch-hitter, played in 22 games and batted .204 (10-for-49) with two RBIs. He started 12 games at shortstop and one at third base.
He was signed last winter as a Minor League free agent out of the Baltimore organization and was called up from Triple-A Omaha on May 3.
"Luis brings a lot of value because of his consistency defensively, he's a switch-hitter and he's a positive presence on the team," said Royals general manager Dayton Moore.
However, Moore said it became "a numbers issue" and Hernandez was the odd man out.
The Royals have 10 days to put Hernandez on waivers, trade him or release him. Moore did not rule out offering Hernandez a Minor League contract if he went unclaimed by another club on waivers.
The choice to reduce the roster basically came down to Hernandez and shortstop Tony Pena Jr. Although Pena is batting just .091, the Royals consider him a better defensive shortstop than Hernandez. Both players were out of options.
"It was a difficult move," manager Trey Hillman said. "We felt like we needed to keep our defensive strength as much as possible, specifically at short. Luis has got that but we felt that Tony has better lateral range. ... We value what [Pena] has the ability to do at a premium position."
Hillman also said the Royals decided to keep a third catcher, Bryan Pena, because he provides a potentially good bat off the bench or occasionally at designated hitter at a time when the club has been scuffling offensively.
Pena is batting .333 and is 3-for-7 as a pinch-hitter.
Dick Kaegel is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.