The short answer is yes, most employers can indeed monitor employee Internet activity. In fact, many legal experts encourage employers to monitor employee Internet activity as a proactive measure, to protect themselves against potential litigation from their employees. Such harassment and discrimination lawsuits have proven to be very costly for employers who failed to diligently monitor Internet activity when the offenses first occurred in the workplace.
While the practice might seem like an invasion of privacy to employees, under most circumstances an employer can monitor employee Internet activity, including e-mails, browsing histories and downloaded files. When many employees are first hired by a company, they are presented with an employee handbook which details their rights and obligations while on company time. Many of these handbooks written or updated after the advent of the Internet specifically mention a "no expectation of privacy" policy when using company-owned computers, servers and printers. "No expectation of privacy" means just that; employees cannot and should not assume their electronic communications will not be examined by their employers at some point in history.
This does not mean that employers have the right to monitor Internet activity outside of the work environment, nor can they compel employees to produce e-mails composed on private e-mail providers such as Yahoo or Hotmail. The company legally owns all of the electronic equipment necessary to create and store e-mails on their own servers. It can also examine the caches and browsing histories of all company-owned computers. Some employers can even install special software designed to monitor employee Internet activity in real time from a remote location.
There is a difference between confidentiality and privacy where electronic communications at the workplace are concerned. The employee handbook may say there is no expectation of privacy, but there could be an expectation of confidentiality. In a typical scenario, an employer could discover an email containing very derogatory comments about an employee's supervisor. The employer most likely would not make the contents of that e-mail public, but he or she may decide to call the employee into his office to discuss the situation which prompted the e-mail. The information gathered when employers monitor Internet activity is considered to be the property of the company, but most employers realize that some communications are more sensitive than others.
In a world where employer-employee conflicts are often settled in courtrooms, not boardrooms, it makes sense for employers to monitor Internet activity in order to have documentation for future litigation. A female employee suing her supervisor for downloading an offensive screen saver on his publicly viewable computer monitor might make a convincing argument for a "hostile work environment." But the company itself may also be implicated in the lawsuit for not taking enough action against the supervisor in the first place. By allowing the offensive screen saver to be downloaded onto company-owned equipment, the company could be held just as liable as the individual supervisor. Only by demonstrating an effort to monitor employee Internet activity could the company hope to separate itself from the lawsuit.
While monitoring an employee's Internet activity may seem Big Brotherish to some, it does serve to keep employees more conscientious about their workplace habits. Having access to the Internet and e-mailing services during work hours, even if limited or monitored, does beat the alternative of having no access at all.