I don’t think the micro switch would need to physical switch wired to it. It depends on which mode you program it in. You could program it in 2-state (flip/flop) mode and just connected the switch terminals with a wire and that would be like the switch is always on. Or you could put it in momentary mode and just leave it disconnected.
So the question is will the Micro Switch be damaged if you apply 120V to the L (Load) terminal which is intended to output 120V, not receive 120V, right? I don’t know. You should probably ask Aeon Labs about that.
Assuming it is safe for the Micro Switch, I’m wondering if the logic would work. It’s a circuit with 2 switches - W (wall switch) and Z (z-wave switch). It sounds like what you want is
W (off), Z (off) = 0 lights on
W (off), Z (on) = 3 lights on
W (on), Z (off) = 5 lights on
W (on), Z (on) = 5 lights on
Is that right? If so, I think in the case of W (off), Z (on) that would turn all 5 lights on because of the connection in the upper right of the box. Wouldn’t it?