Is it legal for an employer to spy on its employees' computers keeping records of their files, use of internet, passwords, etc?

You refer to the computer as "my computer." Is it yours? Or, is it the company's property that is part of the materials and/or equipment that the company provides to you in order for you to perform your job duties? If the answer is the latter, the company has a right to monitor your use of the computer. There is little or no reasonable expecctation of privacy while engaged in use of a company computer and so be careful about restricting the use of the computer to work only.

This answer is provided for informational purposes only. True legal advice can only be provided in an office consultation by an attorney licensed in your jurisdiction and with experience in the area of law in which your concern lies.

Generally speaking, if it's a work computer as opposed to a personal computer, the employee has no expectation of privacy, and the employer has the right to monitor. So, if this is the case, you should keep your personal computer use at home, especially now that you actually know about the monitoring. Having said that, having a computer/Internet use policy that includes notice of monitoring is very common and is considered best practices in the employment world, so your employer's failure to have such a policy or otherwise notify you of the monitoring does not look great for them if some sort of litigation develops. Furthermore, recent case law in New Jersey suggests that, even where there is a such a policy, the employer's right to use information derived from monitoring is not unlimited. For example, if by monitoring your computer your employer found a personal password to a restricted, invitation-only discussion group on Facebook or MySpace and then used this password to access the group, they might very well be liable for subsequently taking action against you based on what they discover. Or, if you were having conversations with your attorney through your personal gmail account on a work computer, a recent case holds that the conversations would still be covered by the attorney-client privilege (of course, for your own protection, you should NOT do this). While New Jersey courts still recognize the general rule that the employer has the right to monitor employees' usage of corporate IT resources, they have been ever-so-slightly more deferential towards the employee in recent months than the courts in other states.

The above is provided for informational purposes only and does not constitute legal advice on a specific matter. You should consult with an attorney in person before taking any definite action in a legal matter.