Do you know if she agreed to do the work in her own time or via your store (as in someone who came to purchase from you).
If it was in her own time then she has full rights to market her skills (just make sure she declared it to the tax-man

). If she did it whilst she was in your place of work (during work hours) you could discipline her for it - not sure how badly though.
Sorry to hear your having this problem. I would definitely give the tax-man a call though - that may resolve your issue entirely.