Not precisely. They're bound by the same California (or whatever the local jurisdiction) laws that everyone else is. The laws state that the employer has no claim to any IP developed by the employee "on their own time, without use of company resources, and not along the lines of business of the company".
The problem is that third clause - since Google operates in so many businesses, there is a potential conflict of interest with virtually anything you might want to do. Google's policy is no different from any other employer's. It's just that if you work at a financial software company and want to develop a social network, you are not competing with your employer. If you work at Facebook and want to develop a trading platform, you are not competing with your employer (yet; who knows what they got planned?). If you work at Google and try to develop either of those, you are competing with official Google products (Google+ and Google Finance, respectively).
There's a procedure in place to clarify whether any IP developed on your own time conflicts with current or present lines of Google's business. I don't know the exact numbers, but IIRC they release about 70% of proposals back to their owners. You can, of course, just take your chances and develop the software anyway; lack of an official release does not mean Google owns your software, it just means Google might own your software, and that's up to a court of law to decide. But who wants to fight Google's legal department? And most VCs or acquirers won't go near you if there's any legal uncertainty surrounding your startup.
The problem is that third clause - since Google operates in so many businesses, there is a potential conflict of interest with virtually anything you might want to do. Google's policy is no different from any other employer's. It's just that if you work at a financial software company and want to develop a social network, you are not competing with your employer. If you work at Facebook and want to develop a trading platform, you are not competing with your employer (yet; who knows what they got planned?). If you work at Google and try to develop either of those, you are competing with official Google products (Google+ and Google Finance, respectively).
There's a procedure in place to clarify whether any IP developed on your own time conflicts with current or present lines of Google's business. I don't know the exact numbers, but IIRC they release about 70% of proposals back to their owners. You can, of course, just take your chances and develop the software anyway; lack of an official release does not mean Google owns your software, it just means Google might own your software, and that's up to a court of law to decide. But who wants to fight Google's legal department? And most VCs or acquirers won't go near you if there's any legal uncertainty surrounding your startup.