I'm sorry, but that isn't correct. California employment law is the most liberal around when it comes to protecting an employees right to perform works on their own time. As long as you don't build a competing search engine, write a competitor to Google mail, etc you're fine. In fact, even if you did, it is likely that Google won't care and won't sue, because the law leans towards the employee in this case.
I have had a number of conversations with Google employees that have told me that they've been prevented from working on outside projects because of this.
Whether Google is on the right side of the law, or not, that's another conversation entirely, but what I'm telling you is from GOOG employees venting to me about work. YMMV
