The Psychological Contract: What It Is, Why It Matters, and How It Breaks

What Is the Psychological Contract?

Psychological Contract: The set of unwritten, informal, and largely implicit expectations, obligations, and beliefs that an employee holds about their relationship with their employer — and vice versa. First formalised by organisational psychologist Denise Rousseau (1989), the psychological contract captures the subjective understanding of what has been promised and what is owed, beyond the explicit terms of the employment contract.

The psychological contract operates at the emotional and perceptual level. Two employees in identical roles with identical contractual terms can hold entirely different psychological contracts — one feeling that the organisation values and invests in their development, the other feeling exploited and overlooked. The difference lies entirely in perception, not fact.

What Does the Psychological Contract Cover?

Employee obligations to the employer typically include:

Effort, commitment, and quality of work above and beyond the minimum contractual standard
Loyalty, discretionary behaviour, and organisational citizenship
Flexibility during periods of change or pressure

Employer obligations to the employee typically include:

Fair pay, job security, and reasonable working conditions
Recognition of contribution and opportunities for advancement
Investment in development and growth
Respectful treatment and management

What Causes Psychological Contract Breach?

Rousseau’s research found that breach of the psychological contract — the perception that the employer has failed to fulfil its side of the implicit agreement — reliably produces:

Significant reduction in discretionary effort and organisational citizenship behaviour
Increased turnover intention (the decision to leave often precedes the actual departure by months)
Reduced trust in management, which is difficult and slow to rebuild
Emotional reactions including anger, disillusionment, and cynicism

Common triggers of breach include: restructuring and redundancy, failure to deliver on promised promotion, management style changes, and organisational culture shifts during mergers or acquisitions.

How Can Leaders Use Psychological Contract Theory in Practice?

Make implicit expectations explicit — Have honest conversations about what each party expects. Unspoken expectations are the most dangerous.
Communicate change early and honestly — Changes that affect the psychological contract (restructuring, role changes, reduced benefits) must be communicated with transparency about the reason and the impact.
Monitor signals of breach — Reduced discretionary effort, withdrawal from team activities, increased sick leave, and disengagement in meetings are early indicators of breach.
Repair actively — Acknowledged breach followed by genuine corrective action can partially restore trust. Ignored breach compounds damage.

Related Organisational Behaviour Resources

The following section contains our original guide to the psychological contract in organisational change.

The psychological contract acts as a good concept for those considering implementation and leading change.

As opposed to the tangible written employment contract which lists formal expectations, payment, working hours and other role specific requirements, the psychological contract is a non tangible, informal agreement between the employee and employer, which almost works at the subconscious level, if you like.

It essentially refers to the mutual expectations people have of one another in a relationship, and how these expectations change and impact our behaviour over time. It covers the things the employee gains from the job and the things he/she expects to provide in return. Important benefits might come in the form to be able to work on one’s own initiative; to make decisions; the opportunity to use certain skills; the ability to work in a good team;

to build relationships with other functions or customers. The list can be endless.

Linking Change

When something changes in a person’s life, this change may effectively be taking something away from them in their psychological contract, which they hold in high regard. This act then creates feelings of resentment and resistance.

For example, a Supervisor running a production cell has just been told that the work that his cell produces is being manufactured elsewhere in another country. His manager has told him that he still has a job, but it will change to a non supervisory status and more of an operator role in a larger production cell elsewhere in the same plant.

What impact would this have on his psychological contract? If this Supervisor values autonomy and the ability to make decisions as a leader of a team, then sure – this change could have massive negative effects and will upset his ‘balance’ in terms of what he holds as value.

In his eyes, this intangible contract has been breached and as a result, he could resist change massively, or even if the change is still progressing, act as a guerrilla, compromising change covertly when he can.

Alternatively, he could even decide to leave, whereby the company may miss an important and experienced member of the team.

Your Psychological Contract

To clarify and to help with understanding, think about your job at the moment, whether it is a part time or full time job: it doesn’t matter. Think about all the intangible elements that you value. Examples could be things like being innovative, being empowered, the interaction with your colleagues, being valued, etc.

Now think how you would feel if the organisation took those intangible elements away from you: What would you do, how unhappy would you be if you couldn’t work with the team that you had so much success with, or that you couldn’t make decisions anymore as those tasks were done centrally, or that you were not asked to use some of your skills?

The impact could be vast, and it could be enough for you to up and leave…

As a change agent, think about the values that those around you hold. What do they see of value in their jobs? List as many elements as you can, and try to predict how they will feel and react if some of those elements were lost.

Managing a Changing Psychological Contract

It is up to the Manager of change to recognise these elements of the contract and understand the impact they will have during and after the organisational change program, working on trying to ‘rebalancing’ and shift this contract to a new level of acceptance.

The change Leader must understand them and then embark on a pursuit to communicate the new vision of change clearly; involve active participation during change and up skill them through a range of training programs. The aim is to reduce the barriers as best one can, addressing the ‘rebalance’ and developing a new intangible contract for the new way of working.

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