Gary Friedman, 54, has stepped down as CEO of Restoration Hardware over relationship with 26-year-old employee

Gary Friedman shows the charisma that made him so closely associated with the brand at a Restoration Hardware opening in 2011 in Los Angeles.(Craig Barritt/WireImage)

The chief executive of luxury homeware brand Restoration Hardware has stepped down after his relationship with a 26-year-old employee was revealed by her bitter ex-boyfriend, it has emerged.

Gary Friedman, 54, quit his role at the furniture chain after the unidentified woman's former flame, who has a criminal record, approached the company with his allegations, sparking an immediate investigation.

The female employee, who has since left the company, is still dating Friedman, who has been divorced for seven years, according to the New York Times's DealBook.

He reportedly stepped down as CEO this week because the in-house relationship had the potential to damage the company's reputation ahead of its initial public offering this fall.

The company formed a special committee and hired a law firm to conduct an inquiry immediately after the ex-boyfriend alerted them to the relationship.

'The board... was concerned about the credibility of the allegations because the ex-boyfriend had a criminal record and was aggressively pressing the accusations both inside and outside the company,' Andrew Ross Sorkin of DealBook wrote.

The female employee told investigators that it was a consensual relationship, but the board feared how it might look, sources told Sorkin.

The board confronted Friedman this month with their findings and he stepped down on Wednesday.

Friedman is largely credited for turning the company, now worth $1 billion, into the highly-regarded luxury brand, which sells faux antique furniture and hardware accessories, the Times reported.

He often appears in the company's catalogues and his letter and picture will feature in the fall catalogue, despite him stepping down. His picture still remains on the company's website.

Boards are becoming increasingly strict with executives; in 2010, Mark Hurd, the former CEO of Hewlett Packard, was kicked out after allegations of sexual harassment from a female employee.

Restoration Hardware has yet to respond to a request for comment from MailOnline.

But earlier this week the company announced a 'reorganisation' of the company's management. The company's co-chief executive Carlos Alberini was named as sole chief executive.

It added that Friedman will be launching a new company, called Hierarchy, which will be connected to Restoration Hardware.

The new venture 'will be created to develop new lines of business, including apparel, accessories, footwear and jewelry, many of which will be complementary to the company’s new product development strategy,' the press release said.

Friedman will continue to advise the company and help with product creation, it said.

'The new structure provides a creative and efficient way to develop new businesses,' said new chairman of the Restoration Hardware board, J. Michael Chu, as the shakeup was announced.

'Gary Friedman, who transformed Restoration Hardware into an admired lifestyle brand in the luxury home market, has demonstrated the ability to re-conceptualize and build some of the most successful brands in the industry, and his continued efforts to drive innovation at Restoration Hardware will be invaluable.'

Sources told DealBook that, even though it could not allow Friedman to stay at the helm ahead of the IPO, they wanted him to keep a relationship with him.

Friedman, who was born in San Fransisco, started his career as a stock boy at a local Gap and rose through the managerial ranks during his 11 years at the company.

He went on to work for Pottery Barn, before joining the Restoration Hardware team and taking over as CEO in 2001, when it was near bankruptcy.