The term 'psychological contract' refers to an exchange relationship based on expectations, beliefs, and an understanding of mutual responsibilities between the employer and the worker. Based on insights from psychology and organisational behaviour, the concept emerged in the early 1960s. It emphasises the importance of the ’human’ side to the employment relationship. Although the psychological contract describes the expectations and assumptions of both employers and workers, research tends to focus on the employee perspective.

The legal contract of employment refers to a signed agreement, about the mutual, formal obligations of the employer and the worker. This offers a limited reality of the employment relationship between both parties. 

In contrast, the psychological contract, describes the working relationship and commitment between employees and employers and what they can expect to receive in return. The psychological contract isn’t generally enforceable. However, courts may be influenced by the underlying relationship between employer and employee.

Employees often assume their employers' obligations based on their actions, even towards other employees. For example, when a manager grants a flexible working request, other employees will expect similar treatment. 

What is covered by the psychological contract?

There isn’t a definitive list of expectations that cover the content of the psychological contract. The psychological contract may include beliefs around:

• Job security.
• Career prospects.
• Training and development opportunities.
• Perceived fairness of pay and benefits.
• Manager support.
• An employer’s contribution and impact on communities and society.

In large organisations, there is not one single person identified as the 'employer'. Senior management, HR and line managers make the day-to-day decisions that affect employees. But it’s sometimes unclear who is personally responsible for decisions affecting an employee’s welfare or the future of the business. However, the quality of line management can strongly affect employees’ experiences at work. For many, the psychological contract is typically the deal they hold with their direct line manager. See more CIPD resources on employee relations and personal relationships in the workplace.

The quality of the psychological contract heavily influences how employees behave from day to day. When workers feel their contributions to the organisation and what they receive back are balanced and fair, there can be positive outcomes (Bera, 2021).

Individual outcomes include:

• increased motivation
• performance
• productivity
• great job satisfaction and intention to stay. 

At a group and organisation level, the psychological contract can reduce hiring costs, increase job security, colleague cooperation and improve organisational performance. 

As the psychological contract is based on fairness and trust, a violation (or breach) of the psychological contract can have sudden negative consequences. It can negatively affect job satisfaction, commitment, performance, and increase turnover intentions (Zhao et al., 2007).

Breaching the contract

Breaches of the psychological contract by an employer are not always avoidable. For example, economic downturn can impact the ’deal’ between the business and its people. Organisations can avoid many negative outcomes if they act fairly, even if they can’t promise positive outcomes for all.

‘Repairing’ the contract requires a re-balance of trust and managing expectations. For example, where an employee shows discretionary effort in exchange for enhanced career opportunities, the employee may revert to a basic ‘transactional’ deal, when this is not fulfilled. Others may be more proactive and treat the situation as an opportunity to learn to offset feelings of uncertainty. 

To successfully repair a contract and avoid further damage, leaders need the psychological and social skills to realign expectations and communicate the organisation’s employee value proposition. Some points to consider when maintaining the psychological contract:

• Employment relationships may break down despite management's best efforts. Nevertheless, it's the managers' job to take responsibility for building and maintaining them.
• Prevention is better than cure. Avoid a breach of contract in the first place, rather than trying to repair the damage afterwards.
• When breach occurs, spend time renegotiating the deal rather than focusing too much on delivery.
• Building resilience skills can help individuals cope better with psychological contract breaches.

For many years the traditional psychological contract focused on job security. Now it focuses on learning and development for long-term employability, and more individualised ways of working. Employers should not underestimate the impact of individual differences. Employee expectations and personal motivation at work will differ across the workforce.   

CIPD’s People Profession 2030 report highlights the diverse nature of employment relationships. Changes affecting the expectations of workers include:

• Uncertain economic conditions (for example, the COVID-19 pandemic and the cost-of-living crisis).
• Changes in the use of tech, automation and AI and shaping future workforce skills.
• Workforce trends and atypical employment contracts.
• Greater expectations for flexible and hybrid working arrangements.
• Organisations downsizing and delayering, putting more pressure on remaining employees.
• Increased use of collective voice or collective industrial action.
• Traditional organisational structures becoming more agile.
• Corporate scandals that can undermine employees’ trust in their employer.

External factors will influence expectations of the employment deal. Employers should consider these drivers to attract and retain talent.

The CIPD’s Good Work Index survey explores the trends in employees’ experience of Good Work. Compared to 2019, UK workers are more likely to perceive work as transactional and are less likely to work harder than they need to. 

To sustain good job quality, the psychological contract offers a way of monitoring employee attitudes and maintaining trusting relationships. It’s central to people performance and engagement at work. 

Managing employee expectations requires people professionals to have input into the broader organisational strategy, and to design and implement people management and development practices that support it.

Specific areas of focus include:

• Employer brand: To be clear on what they expect of, and offer to, employees. Many organisations have created a set of corporate values or a stated mission. This may be called an ‘employee value proposition’ or ‘employer brand’ which employees will recognise and relate to. In practice, the employer brand is an attempt by the employer to signal and shape the psychological contract with employees to help recruit and retain talent.
• Communication: Two-way dialogue between employer and employees facilitates employee voice and employee communication.
• Learning and career development: Employability is a key benefit for many workers. Employees expect their organisation to offer opportunities for skills and career development.
• Management style: Line managers are key to understanding and managing employees’ expectations and carrying out fair processes. Managers need support and skills development to be effective in people management.
• Managing expectations: Be clear with new recruits what they can expect from the job. Managing expectations will increase the chances of building a realistic psychological contract.
• Measuring employee attitudes: Employers should monitor employee attitudes on a regular basis. This helps to identify where action is needed to improve performance. A positive psychological contract will support a high level of employee engagement.

Books and reports