By demonstrating that the phone misinterpreted a word not in its dictionary and that the context of the conversation was about a .NET application the matter was dismissed but I would have thought certain words wouldn't be suggested unless the user overrode the override to put in the offensive word.
There is no way this should have gotten past your co-workers eye if they put any amount of diligence into their writing. I would give them a warning, because it is a red flag that the rest of their work is probably one-shot without review as well. It's just plain sloppy and unacceptable even if the word wasn't a derogatory one.
Imagine if this was in front of a customer. The entire company's credibility would be in question, and possibly lawsuits would fly. So I'm prone to taking a hard stance on this one.
It would be interesting test for your friend to delete the auto correct learning history and then try and replicate. Because mine tries to correct to "nugget".