What Is a Psychological Contract: Types With Examples
Informal understandings and perceptions often shape the employer-employee relationship as much as the formal contract—sometimes even more. HR needs to stay aware of these dynamics to proactively manage expectations.
How motivated and engaged employees feel is strongly influenced by the status of their psychological contract with the employer. When that sense of mutual understanding starts to slip—like when employees feel undervalued or unsupported—it often leads to disengagement. A McKinsey report found that the most common reasons people left their jobs were feeling disrespected, lacking a sense of belonging, and not being recognized by their managers. These issues reflect a deeper breakdown in the employee-employer relationship—often well before someone decides to quit.
The tricky part about psychological contracts is that they’re unwritten, intangible, and sometimes based on unarticulated expectations that employers and employees hold. Still, they can be one of the most powerful drivers of employee behavior—especially in a job market where skills are in short supply and talent is increasingly mobile.
So let’s take a closer look at what a psychological contract is, why it matters, how to create an effective one, and what HR can do when things go off track.
Contents
What is a psychological contract?
Psychological contract examples
Types of psychological contracts
The importance of a psychological contract in the workplace
How the psychological contract is formed
How to create an effective psychological contract
Signs of a psychological contract breach
What HR can do to fix a psychological contract breach
FAQ
What is a psychological contract?
A psychological contract is an informal, unwritten understanding between an employer and an employee. It’s shaped by perceptions, expectations, and mutual obligations. Unlike formal employment contracts, this one isn’t legally binding. It’s more about how both sides interpret their working relationship.
Psychological contract theory was introduced by Denise Rousseau in modern organizational research. Her research emphasized that employees and employers each have expectations about what they’ll give and receive in the relationship—and that alignment on these expectations is key to a healthy work environment.
In practice, the psychological contract reflects how employees and employers view their roles beyond the written job description—what they give, what they get, and how they’re treated. It’s heavily influenced by company culture and leadership behavior and plays a big role in shaping how employees show up at work.
When expectations are met on both sides, the working relationship tends to be strong. But if employees feel let down or taken for granted, trust can erode quickly—and in some cases, the relationship may break down entirely.
Psychological contract examples
The initial stage of the employer-employee relationship clinches a psychological contract. It then evolves as expectations shift due to undeclared common practices, business or role changes, or how people are treated.
To illustrate employee psychological contracts, here are five examples of ways they might occur and what could affect them.
Example #1: Verbal commitments in interviews
An employee applies for an assistant position in a company, but the employer feels they would be better suited to starting at the trainee level. The company may make an informal agreement that if the employee completes a specific training and works for six months in the trainee role, they will be promoted to assistant level.
Although it isn’t written into their contract, it is verbally agreed upon at the interview. This sets up a clear-cut expectation on the employee’s part.
Example #2: Informal policies around parental leave
Informally, the organization has always granted employees parental leave beyond the legal requirement and allowed employees to return to the workforce in a reduced capacity in the first year.
Employees will assume that all future requests for additional time off post parental leave will be approved.
Example #3: Unspoken perks
There is an unwritten rule in a company that the day after the end-of-year party each year, employees are allowed to come in a little later than usual and are not expected to work a full shift.
If the leniency in this circumstance is ever pulled back, employees will interpret it as if they’re losing out on a perk.
Example #4: Cultural shifts over time
An employee starts with an organization when it is small and has a close-knit clan culture. They feel emotionally connected to leadership and understand how their unique contributions benefit the business. As the company grows and morphs into more of a market culture, employees are pushed hard and defined by their performance metrics.
The new situation can lead the employee to believe that the company is not the same one they agreed to work for originally.
Example #5: Changes to compensation structures
A company rewards longevity with broad salary ranges that allow employees to increase their pay based on performance and without having to be promoted. Employees believe their hard work results in job security.
If the company changes the salary ranges based on job levels or implements layoffs, employees will believe they were deceived.
Types of psychological contracts
The four main types of psychological contracts have different characteristics and implications that influence employees’ behavior, outlook, and job satisfaction. By learning how each type works, you can apply them appropriately according to employees’ needs and the organization’s goals.
Here’s a brief explanation of each:
Transactional psychological contract
Focuses on a transactional relationship between an employee and an organization, emphasizing the exchange of specific tasks and rewards. The contract is usually short-term and task-oriented. Employees expect fair compensation for their efforts and compliance with explicit job requirements.
Transitional psychological contract
Occurs during organizational changes and transitions, such as mergers, acquisitions, or restructuring. It reflects the expectations and obligations that employees have during periods of change. Employees may expect security, support, and assistance in adapting to new roles or environments. The contract is often temporary and subject to revision as the transition progresses.
Balanced psychological contract
Emphasizes a fair and equitable exchange between employees and organizations. It acknowledges both monetary and non-monetary aspects of the employment relationship, such as work-life balance, professional development, and job security. This contract type aims to foster mutual commitment, trust, and a sense of wellbeing for both parties.
Relational psychological contract
Focuses on building long-term relationships between employees and organizations. It involves implicit expectations, such as job satisfaction, organizational citizenship behaviors, and opportunities for growth and advancement. The contract emphasizes mutual loyalty, trust, and the belief that the organization will fulfill employees’ career aspirations and provide a supportive work environment.
The importance of a psychological contract in the workplace
A psychological contract helps establish trust and commitment between the employer and employee. Both parties clearly understand what is expected from them and can focus on delivering. Employees who believe their contract is fair (i.e., they receive as much as they give) have a sense of belonging and commitment to the organization. This makes them more dedicated to their work and invested in the company’s wider goals.
When work conditions meet employees’ expectations, the psychological contract is fulfilled, and they will feel more satisfied, engaged, and motivated to go above and beyond. This can boost productivity and performance and reduce the risk of turnover. On the other hand, when the contract is violated or broken by either party, feelings of betrayal, resentment, and disengagement can occur, negatively impacting productivity and morale.
How the psychological contract is formed
A psychological contract is shaped by actions, circumstances, and communications that transpire throughout the employee’s entire employment journey. It is a dynamic process formed by both parties in the following ways:
Before employment
Before joining an organization, candidates interact with its employer brand through a set of values or a specific mission. These serve as a starting point for potential employees’ expectations from the working relationship.
Candidates will also interact with your employee value proposition (EVP), which should demonstrate the unique value you offer employees in return for their skills, experience, and commitment. Your EVP should explain what it’s like to work for your company and why it’s the best place for the employees who thrive there.
Additionally, both parties will have existing expectations. For example, the employee’s expectations are based on previous employers, and the company’s expectations are based on how it currently manages its workforce.
This is one of the first ways an organization can signal and shape the psychological contract with employees and help recruit and retain employees who align with the company’s core values and expectations.
During the recruitment process
The employee psychological contract continues to be formed during the recruitment process as managers discuss in more detail the specific role a candidate is interviewing for, along with expectations, progression opportunities, and pay and benefits.
Candidates will get a glimpse at the company and team culture here and the level of trust, autonomy, and respect employees are given, which are all integral to a strong psychological contract.
On the job
Psychological contracts continue to be developed throughout the employee lifecycle as the employee gains more experience in the job and sees the organization’s culture and values in motion.
Factors including manager behavior, support, job security, learning and development opportunities, and fair and inclusive treatment will shape the contract.
How to create an effective psychological contract
HR, managers, and leaders all play a part in shaping and sustaining a positive psychological contract. Here’s how:
Step 1: Ensure that there is open and honest communication
Creating a line of open and honest communication from the start is integral to creating an effective psychological contract between employer and employee. Share company news, goals, and changes so employees feel clued in and connected. Set clear expectations for job duties and performance, and be transparent about pay, benefits, and career progression.
Ensure that feedback is regularly provided to employees from managers, including what they’re doing well and how they can improve, and give employees a chance to voice their thoughts and concerns and what support they expect and need from their manager. This valuable two-way flow of information nurtures mutual respect and understanding.
Step 2: Be clear about the expectations and obligations of both parties
Job descriptions should contain well-defined skill requirements and key responsibilities that match the day-to-day responsibilities an employee faces when they start work. These should also be stated in the employment contract, as well as details relating to contracted hours, dress code, privacy and data ethics, and anything else relevant to the role and the organization.
Similarly, employers should be clear on what behaviors are encouraged or expected, given the organization’s culture and values. These are often not clearly expressed, leading to employees functioning and behaving in a way that is inconsistent with the organization’s standards.
If you use certain performance metrics or targets to assess individual employee performance, then make these clear from the start so that the employee knows how they will be assessed and what they need to focus on.
Step 3: Build trust by delivering on promises made in the psychological contract
Only make promises the organization can deliver to employees. For example, if you state in an interview or at some point during the period of employment that there will be training opportunities available for skill development, then make sure these are provided and employees are made aware.
If a candidate asks about the possibility of flexible working hours during an interview, which you don’t offer employees, be clear about that and explain why you don’t. It’s better to let a candidate down at this stage rather than over-promising and failing to deliver once they join the organization.
Step 4: Foster a positive workplace culture
A positive workplace culture supports the goals and values outlined in the psychological contract. Leaders have a duty to inspire a favorable company culture by approaching employee expectations and organizational changes with transparency and integrity.
A study by LinkedIn found that 83% of companies agree that an employer’s brand significantly impacts the talent a company can attract and recruit. Since your employer brand helps define your culture, values, and mission and shares them with the world, it has immense value.
Ensuring that your work environment matches your employer brand is essential. Focus on creating a supportive and collaborative workplace where you focus on fairness and inclusion, commit to the wellbeing of all employees, and recognize and reward good performance.
Step 5: Consult with employees to gain insights
Research has found that when employees are engaged, they are happier and more satisfied at work, have lower levels of absenteeism, higher retention and loyalty, and give better customer service. Therefore, conducting frequent employee engagement surveys is essential, as they shed light on how your employees truly feel and their evolving expectations. Then, you can bridge the gap to meet their needs.
According to Forbes, employees who feel heard are 4.6 times more likely to feel empowered to perform their best work. Surveys, informal group feedback sessions, and one-on-ones can all help employees feel valued and gain insights into whether the psychological contract is being upheld or breached.
Signs of a psychological contract breach
A psychological contract breach happens when one party—typically the employee—feels that their expectations or informal agreements haven’t been met. These perceived broken promises can damage the working relationship and lead to disengagement.
As an illustration, we can revisit the first psychological contract example mentioned above. Let’s say the employee who anticipated moving from trainee to assistant level within six months was not granted the promotion. They are likely to interpret the situation as the company not holding up their end of the bargain, leaving them feeling disappointed and even betrayed.
There are numerous signs to indicate that a psychological contract breach is underway at the individual and organizational level, including the following:
Organizational level
- Lower engagement and job satisfaction
- Drop in productivity and performance
- Increased turnover
- Rising levels of absenteeism
- Decline in collaboration and willingness to put effort beyond basic job duties
- Damage to employer brand, making it harder to attract or retain talent.
Individual level
- Employees show a lack of commitment and become demotivated and unproductive
- Less enthusiasm to contribute new ideas or take initiative
- Heightened emotional reactions and negative behaviors
- Putting up a strong resistance to change
- Expressing an adverse attitude toward the company
- More tension and conflict between employees, team members, and managers, leading to further breakdown of trust.
HR tip
Be mindful of how organizational changes—such as restructures, policy shifts, or leadership turnover—can impact psychological contracts. Encourage managers and leaders to communicate with transparency and consistency during times of change.
What HR can do to fix a psychological contract breach
Rebuilding a broken psychological contract is possible—but it requires care, empathy, and a genuine effort to restore trust. When HR takes an active role, there’s a good chance the relationship can recover.
Here are five practical steps to help repair the damage:
1. Understand the expectations
HR professionals must comprehend and recognize the value of both parties’ expectations to make a positive impact and mend the broken psychological contract. By taking this first step and gaining an understanding, HR can assess the situation and develop a plan to move forward.
It’s essential to display empathy and compassion when approaching this issue, as it’s a sensitive and personal matter. By acknowledging and addressing both parties’ viewpoints, HR can take strides toward adapting the situation into a more beneficial psychological contract for all involved.
2. Investigate the root cause
Conduct a thorough analysis to determine the specific issues that have caused the breakdown. This might involve collecting feedback through surveys, focus groups, or confidential interviews to understand their primary concerns and perspectives.
3. Find a solution that aligns with both parties
Once HR has determined the root cause of the issue, the next step is to brainstorm and implement feasible solutions for both the employee and employer. Communication is key in repairing a broken psychological contract, and HR should facilitate open and honest discussions to ensure mutual understanding and agreement on the way forward. Implementing a transparent and effective solution can help restore employee trust and foster a positive work environment.
4. Involve employees and get feedback
Keep employees involved in the process. Ask for their input and check in regularly. Are they starting to regain trust? Do they feel they are treated fairly? Are they re-engaged and committed to their work and the organization?
5. Monitor progress and make adjustments
Don’t assume the issue is resolved after one conversation or adjustment. Continue collecting feedback and track key indicators—like engagement scores, retention rates, or team sentiment. Make changes as needed to rebuild confidence and trust.
HR tip
To keep a pulse on psychological contract health, monitor metrics like:
- Turnover and retention rates
- Job satisfaction survey results
- Employee engagement scores.
Wrapping up
While the psychological contract may be informal and unwritten, its influence on the employee experience is significant. When it’s managed well, it creates a strong foundation of trust, motivation, and mutual respect. When it’s overlooked or broken, the damage can ripple across teams and performance.
Being intentional about setting, managing, and revisiting these expectations can make a real difference in how people feel about their work—and how long they choose to stay.
FAQ
A psychological contract is an informal understanding between an employer and employee based on perceived expectations and mutual obligations. It’s not a formal legal contract, but it shapes how both parties view the relationship and what they expect from each other.
The four types of psychological contracts are typically categorized as the following:
• Transactional: Short-term, task-oriented, and focused on clear exchanges (e.g., pay for performance).
• Transitional: Temporary expectations that arise during periods of change (e.g., restructuring).
• Balanced: A mix of transactional and relational elements, emphasizing both fair compensation and development.
• Relational: Long-term, trust-based, and focused on loyalty, growth, and emotional investment.
An example might be when employees expect an annual raise based on past company practices, but the organization reduces or cancels raises without explanation. Even though the raise wasn’t contractually guaranteed, employees may feel the company has gone back on its word.
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