Short answer: No*
Passwords stored on your local machine can be decrypted by Chrome, as long as your OS user account is logged in. And then you can view those in plain text. At first this seems horrible, but how did you think auto-fill worked? When that password field gets filled in, Chrome must insert the real password into the HTML form element - or else the page wouldn't work right, and you could not submit the form. And if the connection to the website is not over HTTPS, the plain text is then sent over the internet. In other words, if chrome can't get the plain text passwords, then they are totally useless. A one way hash is no good, because we need to use them.
Now the passwords are in fact encrypted, the only way to get them back to plain text is to have the decryption key. That key is your Google password, or a secondary key you can set up. When you sign into Chrome and sync the Google servers will transmit the encrypted passwords, settings, bookmarks, auto-fill, etc, to your local machine. Here Chrome will decrypt the information and be able to use it.
On Google's end all that info is stored in its encrpyted state, and they do not have the key to decrypt it. Your account password is checked against a hash to log in to Google, and even if you let chrome remember it, that encrypted version is hidden in the same bundle as the other passwords, impossible to access. So an employee could probably grab a dump of the encrypted data, but it wouldn't do them any good, since they would have no way to use it.*
So no, Google employees can not** access your passwords, since they are encrypted on their servers.
* However, do not forget that any system that can be accessed by an authorized user can be accessed by an unauthorized user. Some systems are easier to break than other, but none are fail-proof. . . That being said, I think I will trust Google and the millions they spend on security systems, over any other password storage solution. And heck, I'm a wimpy nerd, it would be easier to beat the passwords out of me than break Google's encryption.
** I am also assuming that there isn't a person who just happens to work for Google gaining access to your local machine. In that case you are screwed, but employment at Google isn't actually a factor any more. Moral: Hit Win + L before leaving machine.
Possibly not helpful to many other people, unless you have an HP PC.
The problem was with some bundled software on the PC. Specifically HP Simple Pass (which was never used and neither I nor my colleague were aware of it even being on that PC).
Uninstalling it resolved the problem immediately.
Best Answer
From Google's help: