Unison claims auditors are asking councils that want to participate to hand over lists of employees with personal details. Auditors match names on a council's payroll to those claiming benefits.
The initiative is being piloted in the East Midlands, London and the south-east.
John Freeman, Unison's regional head of local government for the East Midlands, said he had written to all chief executives in his area warning that they risked industrial relations and legal problems under the Data Protection Act.
Paul Vevers, director of audit support at the commission, disputed that auditors are singling out council staff, and said it was not the commission's place to talk to unions.
'Councils should consult their own staff. We can't do that because that would be stepping into the role of management.'