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Unfortunately in the US at least, that's on a state by state basis, with the minority actually letting you separate work projects from out of work projects.

List of states and relevant laws: http://answers.onstartups.com/a/20126

Joel Spolsky, co-founder of StackExchange had probably the best answer to this question that I had read anywhere. http://answers.onstartups.com/questions/19422/if-im-working-at-a-company-do-they-have-intellectual-property-rights-to-the-st/20136#20136

Here is a good discussion on the topic, complete with analogies and a little humor- http://answers.onstartups.com/questions/19422/if-im-working-at-a-company-do-they-have-intellectual-property-rights-to-the-st/20136#20136

Even if you do sign away all rights to your code, there is a small handful of states whose laws override those contract provisions.

For example, I live in Kansas, and Statute 44-130 explicitly states that employment contract provisions about code I write on my own time using only my own resources are null and void. There are a few limitations to that, of course - the coding I do has to be unrelated to my workplace and not derived from work I do at the office, and I have to disclose to my employer what those projects are.

This was covered a little more in-depth in a question on OnStartups, one of the StackExchange sites.

It's called a Loaded Labour Cost. Back the last time I had to deal with this (back in the 90's), the LLC for a staff member, regardless of salary ended up being around $150k/year. That's how much it cost the _employer_ to have you in a seat, pretty much regardless of your salary.

So, the federal government can either pay that themselves and have a full time employee on their staff, or they can pay that plus a markup and have a contractor they can get rid of whenever they want.

The contractor is typically better if only for the ease of downsizing.

http://scienceblogs.com/goodmath/2008/12/another_bad_metric_error_wages.php
http://answers.onstartups.com/questions/10624/calculating-loaded-labor-cost-for-roi

The view of Joel Spolsky regarding the issue.

...

Suppose you have a little game company. Instead of making software, you knock out three or four clever games every few months. You can't invent all the games yourself. So you go out and hire a game designer to invent games. You are going to pay the game designer $6,000 a month to invent new games. Those games will be clever and novel. They are patentable. It is important to you, as a company, to own the patents on the games.

Your game designer works for a year and invents 7 games. At the end of the year, he sues you, claiming that he owns 4 of them, because those particular games were invented between 5pm and 9am, when he wasn't on duty.

Ooops. That's not what you meant. You wanted to pay him for all the games that he invents, and you recognize that the actual process of invention for which you are paying for him may happen at any time... on weekdays, weekends, in the office, in the cubicle, at home, in the shower, climbing a mountain on vacation.

So before you hire this guy, you agree, "hey listen, I know that inventing happens all the time, and it's impossible to prove whether you invented something while you were sitting in the chair I supplied in the cubicle I supplied or not. I don't just want to buy your 9-5 inventions. I want them all, and I'm going to pay you a nice salary to get them all," and he agrees to that, so now you want to sign something that says that all his inventions belong to the company as long as he is employed by the company.

...

Unless of course it turns out that many of them actually start lots of large companies that employ lots and lots of people. Nah...I guess that never happens eh?

Here's a nice link that easily explains how immigrants only ever take away jobs.

http://onstartups.com/tabid/3339/bid/249/Why-Immigrants-Are-More-Likely-To-Start-Companies.aspx

Your posting reminded me of a post I read a while back:

http://onstartups.com/home/tabid/3339/bid/3504/Startup-Developers-Telling-Schmucks-from-Superstars-5-min-quiz.aspx

I agree with all of his points, but the one that resonates with me most is:

"#12. You're going to start your own company someday. So, you're interested in sales, marketing, operations and things other than figuring out how to make Ruby on Rails scale to large numbers of users when there are complicated database queries involved."

I think you're looking for the total package, someone who can do anything, and ends up choosing what they want to do. The problem is, the after #12, none of the "total package" folks will be interested in working for someone else. Thus, the set of candidates is shrinking as they finally take the plunge...

There's an interesting post on Dharmesh Shah's blog about how startups may not want to give away their software for free. One of the points he makes is that in order to charge for something you've got to set up an infrastructure - credit card validation/debiting, SSL cert, and so on - and it's good to get that in place so you can start bringing in some money right away. It's a good read.

I suppose a middle ground might be a free, but invitation-only beta. This seems to be working well for indi, at least so far...