|ijack is right. You will also have to have employees sign a contract forms that says you will be monitoring them. You can't monitor people like that unless they are made aware and sign a form agreeing.|
You can download Untangle and run it on a server. It is a great security appliance as well.
A simpler option would be to sign up for OpenDNS, point your router to their DNS servers and just simply block sites without monitoring.