Yeah, I don't see the employee's ethical issue. He was hired as a programmer. While at the company, using the company's computers, as a hired programmer, he wrote a program. The company owns the work product. Either he lies to his employer about what he's done (which would be almost certainly violating the employment agreement, because he's now using company property -- the program -- without permission and for his exclusive benefit), or he truthfully reports his work status (which is what the employment agreement surely calls for). End of story.
The company, on the other hand, does have an ethical issue. It'd be totally legal to do exactly what OP fears: say thank you for the automation and fire him. But would that be right?
An enlightened company would entertain your offer to deliver the same value as a fee for service at a discount to them. (You would incorporate)