What a controlling bully. Like others, I was fuming as I read your account of his behaviour. It is just plain nasty to tease and goad a child so young - anyone knows a 3 year old hasn't yet developed the necessary social skills to deal with such behaviour.
More important, though, is that children learn by example, which is why it is incumbent upon all family members, and others who are in regular contact with little ones, to set a good example to them, so that they might grow up to be kind, thoughtful and responsible adults. Thank heavens your DD is not reliant upon this awful man for childcare, because your GS would be at real risk of growing into a bully himself - he's already worked out the kind of language his GF understands and retaliated by smacking him.
I really feel for you, luckygirl - it's hard enough on your DD and SiL to have to deal with this, but we grandparents feel so impotent. We can't just wade in and give these bullies a piece of our mind, no matter how desperately we would love to.
for you. (And I hope your new name turns out to be prophetic)
Cruising with a small light weight mobility scooter