If you look from it from an employers standpoint, that employee might not be around for much longer if his/hers side-business kicks off. It can be hard to find candidates that can replace that employee.

If the employee makes more money from that business than from yours, the employee has literally nothing to lose and may start to become sloppy with their work, not take it as seriously as he/she should, etc.

I'd say it's all about control.