Although Lacey strongly denied any such friendship, Fair Work Commissioner Chris Simpson found that "overall" he accepted that a personal relationship existed between the pair.
"Under cross examination, Mr Lacey conceded at one point that he did in fact find the first image funny," Simpson said. "However, Mr Lacey appeared to give conflicting evidence at a later stage that he did not find the first image funny.
"Mr Lacey gave oral evidence that the reason he replied with 'great dick pic' was, 'Because when that first hit me it was the first thing I instantly went 'Wow' ... I didn't take time to think, look at it, I just texted away.'
"I am of the view that the more likely scenario is that Mr Lacey did find the first picture funny, and is attempting to make excuses and distance himself from the situation."
Higgins also claimed such behaviour was "accepted as the norm" and that bakery staff often engaged in sexual discussions, saying a female colleague had once made reference to wearing a "strap-on dildo" and using it on him. Coles strongly denied this.
The previous year, Higgins had sent his boss an image of a naked man wearing a gold watch, to which Lacey replied, "That's a big gold watch buddy."
Simpson said he was "not inclined to accept the evidence from Mr Lacey that he was offended by the gold watch message".
"I am of the view the more likely scenario is that he did find the image funny at the time, and is again attempting to distance himself from the conduct," he said.
The FWC found that although not falling within the definition of sexual harassment, "sending images of such an explicit nature is clearly conduct inconsistent with the requirement to treat others with dignity, courtesy and respect".
Together with Higgins' "aggressive and inappropriate" response to his manager when warned about the text messages, the FWC concluded that his dismissal was "not harsh, unjust or unreasonable".