Psychological Contracts

by Bob MacKenzie

What is a psychological contract?

A psychological contract can be understood as a ‘deal’ between employer and employee concerning ‘the perception of the two parties, employer and employee, of what their mutual obligations are towards each other.

CIPD 2005:2

Psychological contracts are a set of ‘promises’ or ‘expectations’ that are exchanged between the parties in an employment relationship. These parties include employers, managers, individual employees and their work colleagues. Unlike formal contracts of employment, they are often tacit or implicit. They tend to be invisible, assumed, unspoken, informal or at best only partially vocalised. Because of this, you have to make a determined effort to find out what they are.

The case of Design Fabrications illustrates some issues raised by the existence of a group psychological contract.


Psychological contracts at Design Fabrications

For the past five years, employees of Design Fabrications have been allowed to leave work early every Wednesday afternoon, either to attend the local football match or to avoid the ensuing traffic jams. This arrangement has always been ‘understood’ and never written down, so that it’s become an unwritten custom.

Following a management buy-out, employees feared that the new Senior Management Team (SMT) would rescind this arrangement, so the local branch of the Designers’ Union requested that this traditional practice should be formally written into the terms and conditions of employment. In the teeth of growing competition and a downturn in the economy, SMT felt unable to make this blanket commitment, because they felt it would reduce the company’s competitiveness. Instead, therefore, they asked line managers to meet their teams, and explain the reasons why this would not be a good move if jobs were to be kept reasonably secure.

However, SMT indicated that local agreements could be made on a case-by-case basis, depending upon how the order book was looking. Following discussions between managers, individuals and work teams, this arrangement was accepted throughout the company.

By acknowledging the existence of the old psychological contract and by clearly explaining why it needed to be renegotiated, managers were able to create a new psychological contract that was healthy, understood and observed by all parties.

Working with perceptions

Psychological contracts consist of unofficial assumptions and perceptions, often untested, of the workplace relationship that exists between employer and employee. Although they are rarely written down formally and explicitly, they have a powerful impact on employee motivation and performance. They are closely bound up with notions of employment, employability and ‘career’.

Different kinds of contract at work

Work contracts of any sort between two or more parties are put in place to describe the duties of each party and what to do if things go wrong. If all parties are happy with how things are going, and if they feel that the contract is being adhered to, then there are no problems and no action is needed.

Psychological contracts are shaped by the assumptions that people make about their relationships with each other at work. These often-untested assumptions have a strong influence on their performance and their behaviours towards each other. Rousseau (2004) distinguishes between transactional contracts and relational contracts, which overlap with, and ideally complement, each other.

Transactional contracts

Transactional contracts are essentially what we know as standard, written contracts of employment. They are usually agreed when someone joins a particular organisation, and they contain specific clauses that cover formal terms and conditions of service, including remuneration and other rewards, together with sanctions, if the contract is not satisfactorily fulfilled.

Formal contracts of employment

Formal employment contracts are generally written and ‘official’, and tend to be dominated by employer expectations. The topic Employment Contracts explains that they exist if there is ‘mutuality of obligation’ and that they are legally binding. Usually, a formal employment contract is associated with a unique, individual, Person Specification and Job Description.

Relational contracts

Psychological contracts are essentially relational. Relational contracts concern the maintenance and quality of emotional and interpersonal relationships between employer and employee and between peers.

If you then put the transactional and relational elements together, you come up with the following two broad types of individual ‘career’ and organisational psychological contracts:

‘Old’ or ‘traditional’ psychological contracts

Traditional psychological contracts are generally less formalised than employment contracts, and contain an element of employee expectations as well. They are usually presumed to be relatively fixed, and continue to reflect an assumption of ‘permanent’ employment, and a long-term career within a single employing organisation or sector.

‘New’ psychological contracts

New psychological contracts are potentially more unstable, since they can be more temporary or ad hoc. They assume a greater sense of ‘partnership’ between employer and employee, usually on the expectation of a less permanent period of salaried ‘employment’. There is a growing trend towards employment arrangements with ‘interim workers’, contract workers, portfolio or knowledge workers, or ‘interim managers’. Such people may work with an organisation for a limited period, or on an agency or freelance basis. The psychological contract of interim workers is even more complex, because it is negotiated – consciously or unconsciously – as a tripartite relationship between the placement agency, the temporary worker and the temporary ‘employer’.

Things change


There is a not-clearly-definable point at which an item that is an established part of a psychological contract becomes legal and enforceable (see Disciple and Grievance: pitfalls).

Psychological contracts – like the individuals connected with them – change over time and are thus inherently unstable. As we ourselves change, as the composition of our work team changes around us and as our business environment changes, so too do our respective psychological contracts. They become even more complex, because each of us tends to project aspects of the psychological contract that we think we’ve negotiated (but may never have checked out explicitly) on to how we think that other people should behave towards us and to each other at work.

This can create huge problems. We use psychological contracts as a kind of mental map to help us to navigate our way through our working day. If we are not conscious of the existence of this mental map, it may lead us unwittingly to avoid or resist embracing necessary change.