Understand what employee relations means as a concept and what it means to employers
On its own, the legal contract of employment offers a limited representation of the employment relationship, with employees contributing little to its terms beyond accepting them. In this sense, the psychological contract may be more influential as it governs the perceptions of the employer-employee relationship and influences how employees behave from day to day. At its core, the psychological contract is built on the everyday actions and statements made by both parties – the expectations and promises that anchor both positive and negative perceptions. It is intangible in nature – quite unlike the legal contract of employment signed by employers and employees.
This factsheet explores contemporary definitions of the psychological contract within the context of the 21st century employment relationship. It identifies ways that managers can bolster the psychological contract by listening to employees’ opinions and managing expectations effectively. The factsheet also considers the impact of the psychological contract on broader organisational strategy.
The psychological contract emphasises that employment is a relationship between an employer and employee and not just a transaction regulated by a legal contract. As in any relationship, the mutual expectations, beliefs and obligations may be imprecise but need to be understood, respected, and managed. Indeed, unmet expectations affect the employee, organisation and their relationship.
Drawing on insights from psychology and organisational behaviour, this key concept provides a powerful rationale for 'soft HRM' or behaving as a good employer. It doesn’t supply a detailed model of employee relations but it offers important clues to manage such relations. Employers should clarify what they offer, strengthen line management capabilities, and value communication and consultation with employees. If necessary, they need to explain what has gone wrong and increase employees’ resilience whenever possible.
The specifics of the psychological contract might vary across time and with different people. For instance, job security may no longer be the main offer, nor do some employees desire it, so employers might offer and leverage the employability of their workers instead. Essentially, the psychological contract’s power lies in overcoming the belief that a legal contract can fully explain the complexity of the employment relationship.
What is the psychological contract?
The term 'psychological contract' refers to mutual expectations, beliefs and obligations as perceived by the employer and the employee. The concept emerged in the early 1960s and is core to understanding employer-employee relations.
Perceptions of the psychological contract are often informal and imprecise: they may be inferred from actions or from what has happened in the past, as well as from statements made by the employer, for example during the recruitment process or in performance appraisals.
The psychological contract is different from a legal contract of employment which will, in many cases, offer only a limited and uncertain representation of the reality of the employment relationship. The employee may have contributed little to its terms.
The psychological contract may be more influential than the legal contract in affecting how employees behave from day to day. It tells employees what they are required to do to meet their side of the bargain and what they can expect from their job. It may not, and generally isn’t, strictly enforceable, though courts may be influenced by a view of the underlying relationship between employer and employee, for example in interpreting the common law duty to show mutual trust and confidence.
Various authors1,2 identify the following key points:
- The contract is based on employees’ sense of fairness and trust and their belief that the employer is honouring the 'deal' between them.
- People management practices influence the state of the psychological contract.
- The psychological contract can improve employee commitment.
- A positive psychological contract can enable people to realise their potential
- A positive psychological contract has a positive impact on business performance.
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What happens if the psychological contract is broken?
Breaking the psychological contract can have various negative impacts:
- on job satisfaction
- on the commitment and engagement of employees
- on employee well-being
- on employee turnover.
However, breaches of the contract by an employer might result in a positive behaviour shift if the employee has the psychological and social resources to adapt. Individuals actively adopt coping strategies during a ‘contract repair’ process to restore balance and meet their side of the bargain, and to offset loss of position and uncertainty, some individuals display proactive behaviour. Individuals’ characteristics such as their resilience and cultural values will affect the outcome.
Managers need to remember:
- Employment relationships may deteriorate despite management’s best efforts: nevertheless it is managers’ job to take responsibility for maintaining them.
- Preventing breach in the first place is better than trying to repair the damage afterwards.
- Where breach cannot be avoided it may be better to spend time negotiating or renegotiating the deal, rather than focusing too much on delivery.
- Interventions aimed to build resilience skills will help individuals cope better with contract breaches.
What has persuaded people to take the psychological contract seriously?
Changes currently affecting the workplace include:
- more employees working flexibly
- organisations downsizing and delayering, meaning remaining employees have to do more
- collective bargaining is declining, thus the attention focuses more on the relation between the organisation and the individual.
- markets, technology and products constantly changing
- human resources are increasingly recognised as sources of competitive advantage
- traditional organisational structures becoming more fluid.
In this changing context, employees become the key business drivers, the ‘human capital’ which adds value to any business – see more in our human capital factsheet. Organisations that wish to succeed have to get the most out of their people. To do this, employers have to know what employees expect from their work. The psychological contract offers a framework for monitoring employee attitudes and priorities on the dimensions influencing performance.
Employees in large organisations do not identify any single person as the 'employer'. Line managers are important in making day-to-day decisions but employees are also affected by decisions taken by senior management and HR. Employees may have little idea who, if anyone, is personally responsible for decisions affecting their welfare or the future of the business. Unsurprisingly, attitude surveys confirm that employees usually feel more confidence in their line manager, whom they see on a regular basis, than in members of senior management.
To display commitment, employees have to feel that they are being treated with fairness and respect. Many organisations have concluded that they need to create a corporate personality or identity with a set of corporate values or a stated mission - ‘an ‘employee value proposition’ or ‘employer brand’ – which employees will recognise and relate to. In practice, the employer brand can be seen as an attempt by the employer to define the psychological contract with employees so as to help in recruiting and retaining talent. Read more in our employer brand factsheet.
The changing employment relationship
The psychological contract is a dynamic concept for evolving employee-employer relations, but its nature remained unchanged for a many years and generally involved promises of job security. The recession of the early 1990s and the continuing impact of globalisation are alleged to have destroyed the basis of this traditional deal. The new deal focuses on learning and development to ensure employability in the ever-changing world of work, as well as fair pay and treatment by the employer. Our report Attitudes to employability and talent offers further insights.
However, employers should not underestimate the impact of individual differences: while many young people, being more likely to move between jobs and change careers, are not interested in the concept of a job for life, some employees still value job security highly.
The state of the psychological contract
Research suggests that while organisations have been de-layering and reducing the number of middle management posts, many continue to offer careers and that most employees have adjusted their career expectations of individual employers downwards. Many will be satisfied if they believe that their employer is handling issues about promotion fairly. They may also benefit from the opportunity to negotiate alternative career options.
The recent recession has had an increasingly negative impact on employee attitudes, including in relation to job satisfaction and security. This suggests that managers face a serious challenge to restore and maintain employees’ commitment in both private and public sectors. Current statistics on topics including job satisfaction, trust and fairness can be found in our Employee Outlook surveys.
A positive psychological contract typically supports a high level of employee engagement. However the concept of engagement goes beyond employees’ attitudes and underlines the need for managers to draw out employees' discretionary behaviour. Read our factsheet on employee engagement.
The importance of communication
Our research into employee 'voice' demonstrates the importance of communication and specifically of dialogue in which managers are prepared to listen to employees’ opinions. Our factsheets on employee voice and employee communication give more on these related topics.
Managers need to manage expectations, for example through systems of performance management. HR practices also communicate important messages about what the organisation seeks to offer its employers. But employee commitment and 'buy-in' come primarily not from telling but from listening.
Employee attitude surveys can also be an effective tool for exploring how employees think and feel on a range of issues affecting the workplace. In times of rapid change managers and employees frequently hold contrasting opinions about what is going on. Two-way communication, formal and informal, is essential as a form of reality check and a basis for building mutual trust. Our research report Where has all the trust gone? re-examines the issue of trust, exploring why it matters and what can be done to repair it.
Strategic implications of the psychological contract
The psychological contract may have implications for organisational strategy in a number of areas including:
Process fairness: people want to know that their interests will be taken into account when important decisions are made; they would like to be treated with respect; they are more likely to be satisfied with their job if they are consulted about change.
Communications: an effective two-way dialogue between employer and employees is a necessary means of giving expression to employee 'voice'.
Management style: in many organisations managers can no longer control the business 'top down' - they have to adopt a more 'bottom up' style. Crucial information, which management need, is known by employees from their interactions with customers and suppliers.
Managing expectations: employers need to make clear to new recruits what they can expect from the job. Managing expectations, particularly when bad news is anticipated, will increase the chances of establishing a realistic psychological contract.
Measuring employee attitudes: employers should monitor employee attitudes on a regular basis as a means of identifying where action may be needed in order to improve performance.
Breach of the psychological contract can seriously damage the employment relationship. It's not always possible to avoid a breach, but damage is less likely if managers are open with employees about the issues that need to be addressed.
CONWAY, N. and BRINER, R. (2005) Understanding psychological contracts at work: a critical evaluation of theory and research. Oxford: Oxford University Press.
GUEST, D.E., ISAKSSON, K. and DE WITTE, H. (eds) (2010) Employment contracts, psychological contracts, and employee well-being: an international study. Oxford: OUP
UNGEMAH, J. (2015) Misplaced talent: a guide to better people decisions. Hoboken, NJ: John Wiley & Sons.
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COLLINS, A.M., CARTWRIGHT, S. and HISLOP, D. (2013) Homeworking: negotiating the psychological contract. Human Resource Management Journal. Vol 23, No 2, April. pp211-225.
DE CUYPERA, N., VAN DER HEIJDENB, B.I.J.M. and DE WITTE, H. (2011) Associations between perceived employability, employee well-being, and its contribution to organizational success: a matter of psychological contracts? International Journal of Human Resource Management. Vol 22, No 7, April. pp1486–1503.
LUB, X.D., BAL, P.M., BLOMME, R.J. and SCHALK, R. (2016) One job, one deal ... or not: do generations respond differently to psychological contract fulfillment? International Journal of Human Resource Management. Vol 27, Nos5-6, March. pp653-680.
RAYTON, B. and YALABIK, Z. (2014) Work engagement, psychological contract breach and job satisfaction. International Journal of Human Resource Management. Vol 25, No 17, October. pp2382-2400.
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This factsheet was last updated by Stella Martorana, CIPD Research Associate.
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