Was the f/o's employment contract with the company or the captain? Most likely the former.
As a result (at least under most common-law systems), the captain would not have the capacity to avoid the contract (ie. sack the f/o) as he is not privy to the contract.
Unless, of course, the company has specifically given that captain (or its captains as a class) the authority to avoid such contracts on its behalf.
Whether the 'captain is always in command' is irrelevant. This action is regarding the f/o's employment contract, not whether a particular captain feels he can or cannot fly with the f/o. His command extends to not allowing the f/o onto the aircraft, certainly - but not as far as dipping his toe into contracts to which he is not privy.
Given the 'captain is always in command' line, then why not just invite family & friends on board for free for the next trip to Mauritius? Or alternatively: sod it, it's cold in Vancouver (where we are supposed to be flying tonight), so I think I'll take the bird to Cape Town instead tonight. Warmer and the steak's cheaper.
No, like it or not, there are limits to a captain's authority.