The Workplace Surveillance Bill 2005, which will go through Parliament on Wednesday, makes it a criminal offence to read employee e-mails.
NSW will be the first Australian state to outlaw unauthorized surveillance of employees, with criminal charges for employers if they break the guidelines.
The bill covers video cameras, e-mail and tracking devices and allows covert surveillance only if the employer suspects an employee of wrong doing or engaging in criminal behaviour.
NSW Attorney General Bob Debus said employees expect their private correspondence, such as telephone calls, should not be the subject of secret monitoring.
"We don't tolerate employers unlawfully placing cameras in change rooms and toilets," Debus said.
"Likewise, we should not tolerate unscrupulous employers snooping into the private e-mails of workers."
He said the new laws will strike a balance between an employee's right to privacy and the legitimate needs of employers to protect their intellectual and commercial property.
"Unless employers have a court order, they would need to give employees notice that surveillance will be conducted," Debus said.
Welcoming the legislation, the Australian Workers Union (AWU) said the NSW government should be congratulated for taking steps to criminalize "big brother" behaviour by bosses.
AWU secretary Bill Shorten said employees have a right to privacy in their workplaces.
"E-mail is the modern version of the telephone and I think that most employees would reasonably say that their phones shouldn't automatically be tapped at work and I think that should apply to the Internet," he said.