Whoever wrote this question is bias and seems to have the view workers are lazy and often slack off.
outline the basic tenants of an optimal contract when the owner can perfectly observe/monitor the worker’s effort
I am not sure what the person who wrote this question mean by tenants in this context. The only definition I know of involve occupancy of a building.
In terms of a situation where the owner can perflectly observe the worker, it means there is no asymmetric information. The principal and the agent has equal footing, and the agent doesn't get more than market rate. If the worker does anything the principal or owner doesn't like or voids the contract, the worker will get replaced.
Opinion: From the sounds of this, it seems the owner is kind of Draconian, doesn't trust workers, and would not budge in any way shape or form for the worker. Also is sounds like a terrible boss to work for (who wants a boss who constantly breathes down their neck, telling workers to work harder, cracking metaphorical whips, etc.).
Explain the market failure that emerges when the firm owner cannot observe/monitor the worker’s effort. Propose a solution to this market failure.
Due to asymmetry in information, the worker doesn't need to be as efficiently as he or she would need to. The owner may get less than he/she would otherwise get. Of course, if the worker does something that is less than standard, it might call a lot of things regarding quality into question.
Solutions due to asymmetric information usually involve regulations and transparency/disclosure e.g. references, examples of previous work. If the context of the question involves something else (as implied with the need for excessive CCTV footage or observing workers over the shoulder 24/7), then I would need to see the context of the question to comment further.
Opinion: whether you would categorise this as market failure is whether it's something you would consider a failure and whether it should be addressed. If owner is Draconian, then I think there should be better measures to control and observe the owner more than observing the worker.