The Psychological Contract

Do you know that your offer letter or contract of employment is not the only contract you enter into with your employer? There is another contract called the psychological contract, which do not require your signature but you are still deemed to be a party thereto once you sign the physical offer letter or contract of service.

The term 'psychological contract' refers to individual beliefs, shaped by the organisation, regarding terms of an exchange arrangement between the individual and their organisation. It is a set of implied terms of the employment contract, and when taken together with the expressed terms of the physical contract, makes up the whole employer-employee relationship.

Since the psychological contract is not formal and codified, it exists in a state of flux. It is constantly developing based on communication between the employer and the employee. It is based on employees’ sense of fairness and trust, and their belief that the employer is honouring the 'deal' between them. This is why violation (or breach) of psychological contract by the employer can have serious consequences for the organisation, affecting job satisfaction, commitment, performance, and increasing turnover intentions.

The psychological contract is different from a legal contract of employment. A distinguishing feature is the promises in a psychological contract can be inferred from actions and behaviours of others in the organisation. For example, an employee may perceive that the employer has promised to provide an education scholarship to all employees because the employer implied it by paying for one employee’s further education. The psychological contract describes how the parties themselves understand their relationship, their own perceptions of what they commit to the relationship and what they can expect to receive in return.

The courts may be influenced by a view of the underlying relationship between employer and employee, for example in interpreting the common law duty to show mutual trust and confidence. Specific areas of focus of the psychological contract include:

• Employer branding: ‘employee value proposition’ or ‘employer brand’;
• Communications: an effective two-way dialogue between employer and employees e.g. a townhall so as to give employees a “voice”;
• Learning and development: opportunities for skills and career development in the organisation;
• Management style: in many organisations managers can no longer control the business 'top down' - they have to adopt a more 'bottom up' style;
• Managing expectations: employers need to make clear to new-joiners what they can expect from the job;
• Employee engagement: A positive psychological contract typically supports a high level of employee engagement.

When a breach occurs, employers will typically see negative emotions from the employee such as anger, betrayal, or sadness. The employer-employee relationship suffers because there is a lack of trust and respect. Commitment on the part of the employee is reduced. There is less job satisfaction. There may also be a withdrawal of behaviour e.g. the employee is less willing to work hard, to share ideas, and to be a good work citizen.

In the worst case scenario, a perceived erosion of mutual trust and confidence can lead to a constructive dismissal claim. Although claims will not always succeed, employers should understand how breaches can arise in order to minimise their exposure to risk. For employees, they should know that their own 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 good reason. 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.

In order to succeed in a constructive dismissal claim, an employee needs to show that the effect of his employer’s conduct was likely to destroy or seriously damage trust and confidence between the parties, even if that effect was not intended. If there is reasonable and proper cause for the employer’s conduct, there will be no breach. Also, a breach of the duty need not relate to a one-off event. Employees can rely on a course of conduct by the employer culminating in a “final straw” event that leads the employee to resign.

What are the instances where a breach of the psychological contract can happen?

• Grievances: it is not uncommon for a manager to ignore an employee’s concerns because they are too busy or believe the complaint is without merit; however, a failure to take an employee’s concerns seriously and to deal with them in accordance with internal policy could amount to a breach. If the policy is not followed, the employer should have a sound reason for this, and should explain this clearly to the employee.
• Disciplinary procedures: Consider the severity of the alleged misconduct and ensure natural justice prevails in disciplinary investigations and the meting out of punishments.
• Working arrangements: imposing detrimental changes to an employee’s working arrangements, such as workplace location, can often give rise to complaints that the duty has been breached especially if the employee feels that he has been degraded e.g. from having an office room of his own to working in an open office, particularly if no other employee of the same level is affected. Employers should give advance notice and discuss the change with the employee with the aim of obtaining their consent.

Fortifying values such as coherence, integrity and commitment makes it possible to create an ecosystem in which employees and employers respect one another. That is how the various expectations involved in a psychological contract can be fulfilled.

(c) Tahirah Manesah binti Abu Bakar 2019