Definition and Origin
The term ‘psychological contract’ (PC) refers to subjective expectations and obligations perceived by both employer and employee. Taken together with the “hard copy” contract of service signed by both parties, the psychological contract and the contract of service make up the complete employer-employee relationship.
The PC dates back to the early 1960s. In 1989, Professor Denise Rousseau expanded the PC to include a clearer definition, i.e., as promissory in nature, suggesting that it involves “individual beliefs, shaped by the organisation, regarding terms of an exchange agreement between individuals and their organisations.”
Studying the PC in depth provides a useful model for analysing the employer-employee relationship, understanding its role against a business backdrop, and how a more improved relationship can provide value to the organisation.
Difference between a Contract of Service and a PC
In a contract of service, the contract document will contain an explicit outline of duties and expectations of both parties, which must be mutually agreed upon and signed by both parties. PCs on the other hand are established informally through communications between the employer and employee on their respective roles.
An autocratic “boss” will see the employment relationship as simply “I pay, so you do”, but in today’s world of work there needs to be a greater sense of compassion, give and take, and flexibility based on shared understanding and perceived fairness. The impact on employee engagement, staff turnover, absence levels, disputes, and performance must be carefully weighed.
Employees have expectations of what they will receive or experience from the employer in return for their hard work and loyalty. This includes intangible concepts such as levels of autonomy, recognition, control, and respect, and much deeper beliefs about mutual trust, ethics, and values. Employers too have expectations of their employees such as commitment, ideas, effort, flexibility, and tolerance.
The foundation of the PC is the underlying sense of fairness perceived of the employment relationship from the viewpoint of the employee, led by the actions of the employer. Unless openly discussed, each may have a different interpretation of what these all mean. Therefore, the PC encourages regular honest communications between employer and employee.
Is the PC Recognised by Law?
A contract of service will contain mutually agreed conditions of employment. The PC, on the other hand, describes how the parties understand their relationship, their own perceptions of what they commit to the relationship, and what they can expect to receive in return. The PC is therefore generally unenforceable in the court of law, except where it is fundamental to interpret the common law duty of mutual trust and confidence.
Perhaps it is pertinent at this juncture to highlight that in larger organisations, employees 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 is personally responsible for decisions affecting their welfare or the future of the business. In such organisations, employees’ experiences at work are strongly affected by the quality of line management, whom they see on a regular basis. Ergo for many employees, the PC is largely the deal they have with their immediate superior.
Violation of the PC
The PC exists in a state of flux, constantly evolving, changing, and developing in tandem with the communication patterns between the employer and employee. Since it is based on trust between both parties, a PC violation by the employer can have unexpected and impactful consequences for the organisation, affecting job satisfaction, commitment, performance, and increasing turnover intentions.
When a PC breach or violation occurs, employers will start to observe negative emotions from the employees such as anger, betrayal, sadness, reduced commitment, and a sudden deficit of trust in the employer or organisation. There may also be signs of withdrawal, e.g., the employee is less willing to work hard or contribute ideas.
Once the violation is remedied, such as by way of fulfilment of implicit expectations and a more open and transparent communication channel, trends of positive behaviour will emerge. Employees will become more engaged, focused, and feel a sense of attachment towards the organisation, investing themselves not only in their role but also in the organisation as a whole.
Left to fester, however, the PC may give rise to complaints of constructive dismissal. Employees may even allege that their employer has acted in breach of the duty of mutual trust and confidence.
PC and Constructive Dismissal
Every contract of employment contains an implied duty that neither employer nor employee will act so as to breach the duty of mutual trust and confidence that exists between them without just cause and excuse. If either party does breach the duty, it can entitle the other to take action – a breach by the employee may entitle the employer to terminate the contract of employment, a breach by the employer may entitle the employee to resign and claim constructive dismissal.
Although claims may not always succeed, employers should understand how this can happen so that they can minimise their exposure to risk.
While the duty is a mutual one, most claims citing breach of trust and confidence are brought by employees. In order to succeed, an employee needs to show that the effect of the employer’s conduct was likely to destroy or seriously damage trust and confidence between the parties, even if that effect was not intended. The test applied in these circumstances is the contract test, not the reasonable test.
Some examples of how the breaking down of mutual trust and confidence can lead to a constructive dismissal claim:
1. If a manager ignores an employee’s concerns and fails to investigate them in accordance with the organisation’s internal policy;
2. Unnecessarily suspending an employee prior to an inquiry. Employers should consider the severity of the alleged misconduct vis-a-vis the risks of allowing the person to remain working before making a decision.
3. Misunderstanding regarding bonuses or benefits can lead to claims that the duty has been breached. If certain perks are non-contractual, make sure these are documented properly and acknowledged and agreed upon in writing by the employees to minimise misconceptions.
4. Imposing detrimental changes to an employee’s working arrangements. Always give advance notice and discuss the change with the employee to obtain their consent.
Relevance of the PC to Contemporary HR
The PC is central to people’s performance and engagement at work. Successful management of employee expectations requires leaders to provide input into the broad organisational strategy, as well as to design and implement the people management and development practices that support it. This may include:
1. Having a clear employer brand, a set of employee value propositions which employees will recognise and relate to. This employer brand can be seen as an attempt by the employer to define the psychological contract with employees which will help in recruiting and retaining talent;
2. Fostering effective two-way dialogue between employer and employee as a necessary means of giving expression to employee ‘voice’;
3. Offering learning and career development opportunities to employees; and
4. Changing the management style. Many organisations are still controlling the business ‘top down’, but to have a healthy working environment the line managers must be empowered as they are also key to understanding and managing employees’ expectations on fair processes.
Tahirah Manesah Abu Bakar is the Specialist Consultant and partner of Funktional Solutions. She is also a Research Fellow with the National Human Resource Centre (NHRC) of HRD Corp. She has more than 24 years of experience in Industrial Relations and HR Professionals across the spectrum of industries.
The views expressed here are entirely the writer’s own.
