Experienced sous-chef Adam Steele, 28, reportedly spent a night in gaol after his alleged assault on another chef was witnessed by housemaids, footmen, and other servants.
According to the Mail Online the trouble erupted after Steele was confronted by his colleague about how much he had been drinking.
"No one knows what exactly was said to Adam, but it was something like, 'You've had enough, it's time to stop drinking,'" an insider told Daily Mail.
"Whatever it was, the next thing the other man has blood over his face and a cut eyebrow. It's ironic because they work together and we all thought they were friends."
According to the Daily Mail an internal investigation was conducted by Mark Flanagan, who is tasked with managing the royal kitchens, and Steele was stripped of his pass and dismissed from duties following the incident.
The palace source reportedly told the Daily Mail that management was sad to see Steele go because the Queen's husband, Prince Phillip was so fond of the young employee.
"Mark wanted to keep him because the tragedy is Adam is a very good chef, and popular with the royals," the source reportedly told the Mail Online.
"He has cooked for the Queen at Craigowan Lodge at Balmoral and he is a particular favourite of the Duke of Edinburgh.
"Whenever the duke has his shooting parties at Wood Farm on the Sandringham estate, he always asks for Adam."
While Steele told the Daily Mail he was not allowed to comment on the matter, his mother, Gillian, 63, said her son's dismissal was a shock.
"He has been at the Palace a number of years and I knew he was well-liked and popular so I can't understand how this has happened," she said.
A Scotland Yard spokesman told the Daily Mail Steele was charged with assault and appeared at Westminster Magistrates' Court on November 4.