Side projects are an indication that your employee has an enthusiasm outside of their day job for technology - it's such an important part of my employment strategy. You'd be insane as an employer to try to stifle that enthusiasm when you can harness its unbelievable benefit. I actively seek such individuals and it's a specific part of the interview process.
Employers cannot have their cake and eat it...
Compare those who work on side projects in their own time; playing with new technology, solving problems basically doing homework and becoming better developers as a result, with those who do nothing outside of their day job. It's a no brainer.
Employment contracts should always contain clauses to make the position clear - in ours, if it's done outside office hours the company has no claim on the IP. This is a 101 for employment contracts along with all the other basics such as non-competing and so on. If you're not familiar with these and you're employing people then you're asking for trouble.
One word of caution: when I say 'side projects' I don't mean a second job. In my experience, those working as regular freelancers outside of their permanent positions can detrimentally impact their performance at work - if they are doing it just for the additional cash or to hedge their career then there are warning signs flashing. If it's about innovating, trying out new things and building stuff they are passionate about then it's a wonderful employer benefit at no extra cost.