The Department for Transport is among a range of public organisations that has paid private firms to spy on its behalf, while it has been claimed some 14 bodies, including 10 councils, may have commissioned potentially illegal surveillance.
The findings, obtained under the Freedom of Information Act by civil liberties and privacy campaigners Big Brother Watch (BBW), showed that £3.9m has been spent by public bodies in the last two years on paying private investigators for surveillance work -including snooping on their own staff.
A total of 29 organisations - 27 councils, one public authority and one government department, the DfT - paid private firms to undertake surveillance using powers under Regulation of Investigatory Powers Act (Ripa) in the years 2010/11 and 2011/12.
But some 14 organisations - 10 councils and four public authorities - paid private firms to undertake surveillance that was not covered by Ripa - meaning they commissioned potentially illegal activity.
Two public authorities and two councils paid other public bodies to spy on their behalf at a cost of £7,600, while four councils - Caerphilly, Dudley, Leicestershire and York - used private investigators to monitor their own staff.
BBW director Nick Pickles said: "This research has uncovered cases where it looks like the law has not been followed and it's essential they are urgently investigated.
"Unlike the US, British law isn't strong enough to stop evidence obtained by illegal surveillance being used in court and the punishments for people deliberately flouting the law are trivial.
Eric Pickles says councils which have flouted the law should face justice "We need a proper licensing system for private investigators, reformed laws to stop unauthorised surveillance being used in court and most importantly to replace the Regulation of Investigatory Powers Act with legislation that is fit for purpose."
City of York Council denied using private investigators and said it had used an external fraud team.
BBW has recommended urgent reform of Ripa to protect against unauthorised surveillance by third parties.
The Police and Criminal Evidence Act 1984 should be strengthened to stop unauthorised surveillance by raising the bar about what evidence can be used in legal proceedings, BBW recommended.
The group also wants private investigator licensing to be strengthened and a duty to regulate contracted investigators to be introduced.
Communities secretary Eric Pickles said: "This Government has clamped down on the overuse and abuse of surveillance powers by town halls.
"Such powers can only be used for serious crimes, and require a magistrates' warrant. It is totally unacceptable if councils are trying to sidestep these important new checks and they should be held to account for acting outside the law."
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