Humphf.
Sure is a tough one there, Pat. Not a situation I'd wanna be in, but in all fairness, I can't believe the owner had NO idea any of this was going on over such a long period of time. In our shop, we all talk about all kinds of things and we bounce ideas, stories and problems off of each other all the time. Some people think that's not good to be so buddy/buddy, but that's me. I like people and want to help in any way I can... if it's a worthy cause.
With all of the problems and insight this guy/owner has now, so long after so much has happened, I would probably try to help this guy. Sure, he might've done some pretty nasty things, but the way he was described here, he was embarrassed or had too much pride to ask for help and wanted to fix it on his own. Yeah, he went about it wrong, but he sounds decent and I would want to help him get back on track.
I would not fire him, but I would put him on probation and start a plan with him to get his life back in order. Try council with him and see that those kids are cared for properly. The money he made is gone and no use in discussing. They all need to look to the future for a successful outcome here.
I have to agree.
I would definately take away his key, or have the locks changed at his expense. Also, offer to do the side work for him, only not on the side. Let him pay you a "trade discount" so that he can make money on the jobs, much like a salesperson. Maybe the extra income coming to you will help you out, and he should be able to make a few bucks off of the jobs he sold, and he will get paid a hourly rate for doing them during normal business hours.
Put it all in writing and have him sign it. If he wont agree to the terms, then fire him.