The basic legal rules on protecting employment data are set out in the Data Protection Act 2018 - the main legislation governing the collection, processing and distribution of personal data in the UK. These are set out in our Quick Guide on Data Protection, however, bear in mind that breaching data protection rights of staff could also automatically breach other duties you owe them (eg serious breach of data protection and privacy rights could amount to breach of contract as a result of failure in the duty to maintain trust and confidence, or it could even be constructive dismissal).
Openness is key; you should tell employees the types of data you might collect about them and what you do with it in a Data Protection Privacy Notice/'Fair Processing Statement' - a statement describing how you collect, use, retain and disclose personal information. For information on creating a Data Protection Privacy Notice, Ask a lawyer. A good tool for handling tricky data protection issues is to do a privacy impact assessment (PIA). Where intrusive action is unavoidable, think of ways to manage and reduce the impact and provide written instructions to those involved, as a record of the steps taken.
Putting a data protection and data security policy in place in your organisation can ensure that you follow a set process which gives confidence to employees and clients alike and helps avoid any potential claims.