Posted 08 June 2009 - 08:33 AM
If in the document that they signed there is nothing that says they agree to be monitored, then your boss can be sued. Even though the computers may be company property, there is an expectation of privacy. However, if the employees expect that they will be monitored, then there are any number of steps that can be taken; specific sites can be blocked by IP at the router level or at the machine level, software to monitor, or software to block.
If he wants to pay you to write a logger, then great. I expect in 5 or 6 months you may have something usable. It would be cheaper to buy a ready-made solution. Keyloggers work at the kernel level, and are not trivial to write. Alternatively, it wouldn't be too hard to write a program that parses logs looking for the IP addresses of banned sites.
There are tons of ready made solutions; instead of looking for keyloggers, look for free computer monitoring software.