What should I do about my moonlighting employee?

Your employee doesn't think he has a future and room for personal growth at your company, so he's looking elsewhere. You can't expect people to be really dedicated when the job is kind of crummy and unchallenging.

So try to figure out why he's not motivated, and see if you can fix it. And if he starts doing good work, then he deserves to get compensated fairly. You have a cultural problem, and firing people won't fix that.

Maybe he is helping someone to hit a goal. I had a friend do that for me. He has zero intentions of leaving his paid startup gig.

Have you told them why you think their work is not always up to par? You sound generally satisfied with their work, but in your eyes it's not perfect.

Let them know what they can do to make their work better. They likely think they're doing a great job, which is why they've asked for a raise.

It's obviously important to you that an employee only hold down one job at a time -- is that in your employment agreement? If not, maybe you should add it in if it bothers you. Otherwise your employees have no idea they're doing anything wrong.

Communicate, communicate, communicate.