Why would it be illegal?
The employee is doing work for a employer on a platform provided by the employer.
The employee is doing work for a employer on a platform provided by the employer.
I knew a guy who worked night shifts because he wasn't getting notoced by the shift supervisors when he went out for a smoke. There were less shift supervisors on night shifts.
See how broken your logic is?
My reasoning of why employee surveillance is fine is that there's a genuine purpose/need (measuring employee productivity) while personal privacy is retained (e.g. don't import personal information into the corporate 365 environment and personal privacy is retained). I'm not saying the metrics provided by 365 are correct, but I don't see the legal argument against it.
You along with all of the other commenters have just responded with the generic assertion of "European privacy rights aka GDPR, duh." But then you don't actually support your assertion whatsoever.
GDPR is not a blanket prohibition on collecting data.