The term 'psychological contract' refers to individuals’ expectations, beliefs, ambitions and obligations, as perceived by the employer and the worker. The concept emerged in the early 1960s, drawing on insights from psychology and organisational behaviour. 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 about one another, the concept has been mainly studied from the perspective of the employee.

The psychological contract differs from a legal contract of employment which offers a limited reality of the employment relationship between both parties. The legal contract refers to an agreement, usually written and signed, about the mutual, formal obligations of the employer and the worker. 

The psychological contract, on the other hand, describes how the parties themselves understand their relationship, their own views of commitment and what they can expect to receive in return. The psychological contract isn’t generally enforceable. However, courts may be influenced by a view of the underlying relationship between employer and employee.

Employee’s perceptions of their employers’ obligations are often informal and imprecise and may be inferred from actions (even towards other employees), or from what has happened in the past. For example, an employee who observes a manager granting a flexible working request may expect similar treatment from their own manager. Another example  might be seen in the recruitment process, in performance reviews, or publicly (such as in the statement of organisation’s values).

What is covered by the psychological contract?

There isn’t a definitive list of expectations and obligations describing the content of the psychological contract. Broadly, the psychological contract may cover the following aspects of the employment relationship and how they interact:

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

For employees in large organisations, there is not one single person identified as their 'employer'. Employees are affected by decisions made by senior management and HR and the day-to-day decisions made by line managers. But it’s sometimes unclear who is personally responsible for decisions affecting an employee’s welfare or the future of the business. Unsurprisingly, attitude surveys confirm that employees’ experiences at work are strongly affected by the quality of line managers who they see on a regular basis. For many employees the psychological contract is largely the deal they have with their direct line manager.

The quality of the psychological contract heavily influences how employees behave from day to day. When workers perceive that their contributions to the organisation and what they receive back from the employer are balanced, and fair, there can be positive outcomes. For example, workers who perform better, demonstrate more extra-role behaviours, and indicate a higher level of commitment to the organisation. See more CIPD resources on managing the employment relationship.

The psychological contract is based on employees’ sense of fairness and trust, and their belief that the employer is honouring the 'deal' between them. A violation (or breach) of the psychological contract by the employer can have sudden and powerful consequences for people and organisations. It can lead to negatively affecting job satisfaction, commitment, performance, and increase turnover intentions.

Breaches of the psychological contract by an employer are not always avoidable. External factors like economic downturn can impact the ’deal’ between the business and its people. However, organisations can avoid many negative outcomes if they demonstrate fairness in how they deal with the situation, even if they can’t promise positive outcomes for all.

When a contract requires ‘repairing’, individuals attempt to restore balance, either by seeking alternative ways to meet their expectations or lowering their expectations. For example, where a relational expectation has led to working additional hours in exchange for enhanced career opportunities, the employee may withdraw their extra-role behaviours and transition to a basic ‘transactional’ deal, when this is not fulfilled. Others may react by displaying proactive behaviours, treating the situation as an opportunity to learn, to offset loss of position and uncertainty. 

To deal with contract repair successfully and avoid people leaving the organisation, individuals need to have the psychological and social skills to realign expectations. Read case studies from Zurich Life and Isos Housing about managing change in the employee proposition.

Managers need to remember:

• Employment relationships may break down despite management's best efforts. Nevertheless, it's the managers' job to take responsibility for building and maintaining them.
• Preventing breach in the first place is better than trying to repair the damage afterwards. Trust is key to the relationship.
• 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 at building resilience skills can help individuals cope better with psychological contract breaches.

Although the psychological contract is a dynamic concept, patterns and trends can be observed over time. For many years the traditional psychological contract focused on the promise of job security. Now it focuses much more on learning and development for long-term employability, and more individualised ways of working.

Employers should not underestimate the impact of individual differences and varying expectations of employees. For example, some are less interested in “a job for life” (and may want to move jobs and change careers), whilst others value job security.

CIPD’s People Profession 2030 research highlights the growing, diverse nature of employment relationships in the future. Changes affecting the expectations of workers include:

• Uncertain economic conditions (for example, the impact of the COVID-19 pandemic and the cost-of-living crisis).
• Technological changes automating processes and shaping skill demands.
• Atypical contracts and the 'gig economy', creating a highly competitive global marketplace for some and offering extended career opportunities to others.
• Greater expectations for flexible working arrangements.
• Organisations downsizing and delayering, putting more pressure on remaining employees.
• Increased use of collective voice or collective bargaining, although many employers and individuals still negotiate the relationship directly.
• Traditional organisational structures becoming more agile.
• The public nature of corporate scandals that can undermine employees’ trust in their employer.

In this changing context, employers should consider the key drivers of the employment deal, to be able to attract and retain key talent. The psychological contract offers a way of monitoring employee attitudes and priorities.
How are employers responding to the changes?

In a response to change and uncertainty in today’s work environment, the UK government has committed to creating ‘Good Work’ and job quality, as highlighted in the 2017 Taylor Review of modern working practices. Our Good Work Index survey provides seven dimensions of job quality and a snapshot of workers’ current attitudes to and experience of work.

Our previous research shows that despite the modern employment deal being based on the promise of employability, employers are highly selective about offering development and career opportunities. 

While such an approach to distributing opportunities is reasonable, it does present a risk to long-term sustainability:

• Firstly, there’s a risk that employers’ selective development strategies lead employees to perceive the relationship as highly transactional. It depends on their willingness to contribute, rather than one of mutual commitment. With loyalty of employees undermined, organisations may find they struggle to retain staff.
• Secondly, employers must consider the type of deal they offer to workers who are not considered to represent key talent. Disgruntled employees present risk of increased operational costs associated with high turnover and risk of reputational damage.

The psychological contract is central to people performance and engagement at work. Managing employee expectations requires people professionals to have input to the broad organisational strategy, and to design and implement the 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.
• Communications: An effective two-way dialogue between employer and employees is a necessary means of giving expression to employee voice and employee communication.
• Learning and career development: Employability is a key employment offer to many workers. Employees expect their organisation to offer opportunities for skills and career development.
• Management style: In many organisations, managers can no longer control the business 'top down' - they have to adopt a more 'dialogic' approach. Line managers are key to understanding and managing employees’ expectations on what fair processes and outcomes look like in an organisation.
• 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 building 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 to improve performance. A positive psychological contract typically supports a high level of employee engagement.

Books and reports