In the end I got it to work. You were right, it was an issue with permissions on the c:\ but just simply not specifying a path didn't help.

I ended up with

declare @sql varchar(8000)

select @sql = 'bcp AICS_Employees.dbo.Employee out c:\bcp\bcptest3.txt -c -t, -T -S'+ @@servername

exec master..xp_cmdshell @sql

worked perfectly.

If I simply changed the path to c:\

declare @sql varchar(8000)

select @sql = 'bcp AICS_Employees.dbo.Employee out c:\bcptest3.txt -c -t, -T -S'+ @@servername

exec master..xp_cmdshell @sql

i get this error

SQLState = HY000, NativeError = 0

Error = [Microsoft][SQL Native Client]Unable to open BCP host data-file

NULL

thanks again for your help.