The Psychological Contract: What It Is and Why It Matters for HR
Every employment relationship involves two contracts. The first is the legal contract—written, signed, and enforceable through law. It specifies salary, working hours, notice periods, and other formal terms. The second contract is psychological—unwritten, assumed, and existing entirely in the minds of the employer and employee. This psychological contract often has more influence over day-to-day behaviour than any formal agreement.
The concept was first introduced by organisational psychologist Denise Rousseau in the 1980s and 1990s, building on earlier work by Chris Argyris and Edgar Schein. Rousseau defined the psychological contract as an individual's beliefs about the terms and conditions of a reciprocal exchange agreement between themselves and their organisation. These beliefs are subjective and perceptual—what matters is what each party believes was promised, not what was formally stated.
Understanding the psychological contract is essential for HR professionals because it explains so much about employee attitudes and behaviour. When the psychological contract is healthy, employees feel valued, motivated, and committed. When it's violated, even in ways that seem minor to employers, the consequences can include disengagement, reduced performance, and ultimately turnover.
How the Psychological Contract Forms
The psychological contract begins forming before employment even starts. Job advertisements, recruitment conversations, company websites, and social media presence all create expectations. When an interviewer emphasises work-life balance or a careers page highlights development opportunities, candidates build these into their expectations of what working for the organisation will be like.
During onboarding, the psychological contract continues to develop. The reality of the job either confirms or challenges pre-employment expectations. If the role matches what was described, trust builds. If there's a significant gap between promise and reality—sometimes called the "reality shock"—the psychological contract starts under strain.
Ongoing experiences shape the contract throughout employment. How managers treat their teams, whether promised training materialises, how the organisation responds to crises, and countless daily interactions all contribute. The psychological contract isn't fixed at the point of hiring—it evolves continuously based on what employees observe and experience.
Importantly, the psychological contract is individual. Two people in identical roles might hold quite different psychological contracts based on their conversations during recruitment, their relationships with managers, and their own expectations and values. This makes managing the psychological contract complex—there's no single contract to maintain but rather thousands of individual expectations to navigate.
Transactional and Relational Contracts
Researchers distinguish between transactional and relational psychological contracts. Transactional contracts are narrow, economic, and short-term focused. The employee provides specific work outputs; the employer provides specific compensation. There's limited emotional involvement, and either party can exit the relationship without significant personal cost.
Relational contracts are broader, open-ended, and involve emotional investment. Employees expect more than just pay—they expect fair treatment, development opportunities, job security, and meaningful work. In return, they offer not just task performance but loyalty, flexibility, and willingness to go beyond minimum requirements.
Most psychological contracts contain both transactional and relational elements, but the balance varies. A temporary contractor might have a predominantly transactional contract—deliver the project, get paid, move on. A long-serving employee who has built their career with the organisation likely has a strongly relational contract with deep expectations about mutual loyalty and support.
The nature of psychological contracts has shifted over recent decades. Traditional employment relationships were heavily relational, with expectations of long-term employment and mutual loyalty. Contemporary employment relationships are often more transactional, with shorter tenures and less expectation of lifetime employment. However, employees still often hold relational expectations even when employment patterns have become more transactional—a mismatch that creates tension.
When the Psychological Contract Breaks
Psychological contract breach occurs when employees perceive that the organisation has failed to fulfil its obligations. This perception matters regardless of whether the organisation actually promised anything or whether the failure was intentional. If employees believed something was part of the deal and it doesn't materialise, they experience breach.
Common triggers for breach include broken promises about promotion or development, unexpected changes to working conditions, redundancies that seemed to violate implicit job security expectations, or managers treating employees in ways that feel unfair or disrespectful. Even organisational changes that seem necessary and reasonable from a business perspective can trigger breach if employees expected stability.
The consequences of breach are significant and well-documented. Employees who experience breach report lower job satisfaction, reduced organisational commitment, and diminished trust. Their performance often declines, not because they lack capability but because they're less willing to invest discretionary effort. Citizenship behaviours—helping colleagues, suggesting improvements, representing the organisation positively—tend to decrease.
In severe cases, breach leads to violation—an emotional response involving feelings of betrayal, anger, and resentment. Violation goes beyond cognitive recognition that something went wrong; it involves an affective reaction that can permanently damage the employment relationship. Employees who feel violated are far more likely to leave, and those who stay may engage in counterproductive behaviours.
Implications for HR Practice
Understanding the psychological contract has practical implications across multiple HR activities. In recruitment and selection, the emphasis should be on realistic job previews that set accurate expectations rather than overselling the role. It's tempting to present an idealised picture to attract candidates, but this approach backfires when reality fails to match the promise.
During onboarding, organisations should explicitly discuss expectations—both what the organisation expects from new employees and what employees can expect from the organisation. This conversation makes implicit expectations explicit, reducing the risk of misunderstandings. Some organisations use formal expectations discussions as part of their induction process.
Performance management and career development conversations provide ongoing opportunities to maintain the psychological contract. Regular dialogue about expectations, progress, and future opportunities keeps the contract current and allows adjustments when circumstances change. Silence from managers can be interpreted as confirmation that expectations will be met—until they're not.
When organisational change is necessary, communication becomes critical. Employees understand that business conditions change, but they need honest explanation about why changes are happening and what they can expect going forward. The psychological contract can be renegotiated if the process feels fair and respectful, but attempting to impose changes without acknowledgment tends to trigger breach.
Training line managers to understand the psychological contract is valuable. Most psychological contract experiences occur locally, in day-to-day interactions with immediate managers. A manager who makes promises they can't keep, fails to recognise contributions, or treats team members inconsistently can damage psychological contracts regardless of how well the organisation performs at a strategic level.
Measuring and Monitoring the Psychological Contract
While the psychological contract is inherently subjective, organisations can gain insight into its health through various methods. Employee engagement surveys often capture elements of the psychological contract, particularly questions about trust, fair treatment, and whether the organisation meets expectations.
Exit interviews provide valuable data about psychological contract breach. When employees leave, asking about expectations and whether they were met can reveal patterns. If multiple departing employees cite broken promises around development or work-life balance, this signals a systematic issue.
Stay interviews—conversations with current employees about what keeps them and what might cause them to leave—can identify psychological contract concerns before they lead to turnover. These conversations work best when managers genuinely listen and follow up on what they hear.
Qualitative research methods like focus groups and interviews can explore the psychological contract in depth. While surveys capture broad patterns, conversations reveal the nuances of how employees understand their relationship with the organisation. This richness helps HR professionals understand not just what's happening but why.
The Psychological Contract in Contemporary Work
Several contemporary trends affect psychological contracts. Remote and hybrid working has changed how employees experience organisational membership. Without daily physical presence, the cues that reinforce connection and belonging need deliberate cultivation. Employees working from home may develop different psychological contracts than those in the office.
The growth of non-standard employment—gig work, fixed-term contracts, agency work—creates different psychological contract dynamics. Workers in these arrangements may have predominantly transactional expectations, or they may still hold relational expectations despite their employment status. Understanding these nuances matters for organisations using blended workforce models.
Generational differences in expectations mean that employees may arrive with different baseline assumptions about what employment involves. While generational generalisations should be treated cautiously, it's reasonable to expect that someone entering the workforce today has different expectations than someone who started their career thirty years ago.
The emphasis on employee experience in contemporary HR practice connects directly to psychological contract thinking. When organisations design employee experiences, they're effectively shaping the conditions that form and maintain psychological contracts. Getting this right creates engaged, committed employees; getting it wrong creates disillusionment and turnover.