Employees who are knowledge workers and who do side projects have more exposure to technologies and situations that can have great benefit to you, their principle employer, however, that benefit comes at a price to you, the employer, it isn't free.
Studies have shown that optimum creative output is a bell curve with the highest output happening at about 35 hours per week, and
for every simultaneous project that a person manages they lose 20% of their output to context switching.
If you're smart, you realize that everyone only has so much creative energy to give and as such you make sure that your employees work 35 hours per week, and that they take their vacation.
And if you're really smart, you make sure that your employees only work on one project at a time, because holding the mental constructs of multiple simultaneous projects in their head kills their productivity due to having to switch contexts.
But, if your employee isn't that smart, or to be frank, doesn't care about the creative energy they give you, they can wipe out your progressive management practices by spending all of their free time on other work, not getting the down time they need to recharge, and having to carry too many mental constructs in their head.
Sure, some work on the side can have a huge benefit, but I don't think it can be consistent, or exceed a few hours per week, without you, the employer, unbeknownst to you being an investor in that work.
Now, if you aren't paying what you should be, and you are putting that employee in the situation where they feel they have to do side work, shame on you. You deserve the situation. But if you are paying what you should, and the above is happening to an extent that you are not getting the creative output you have paid for, best turn the table. Make the employee a contractor who does side projects for you and let them do their other work full time.