HR Glossary
Psychological Contract and Why it is important

Psychological Contract and Why it is important

Updated on:
August 22, 2022


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What is a Psychological Contract and Why it is important?

The psychological contract is defined as the unspoken or unwritten expectations that parties hold regarding the contract they are entering into. While some of the expectations are explicitly stated in the contract, others are unknown to all parties.

Psychological contracts are implied or agreed upon by both parties, where one party makes promises to the other party.

A psychological contract can be simple or complex and can include multiple layers. For example, a contract may state that in the event one party cannot perform its part of the agreement, the other party will return the money.

A psychological contract can also be much more complex. For example, if an individual makes promises to a business partner, they may make a psychological contract that states that the partner will compensate them if either partner decides to leave.

Two parties who are entering into an agreement (such as a business relationship or employment agreement) must reach an agreement about the elements of a contract. When the parties have not reached a consensus, they are said to be at an impasse. When the parties reach an impasse, they may discuss the issue to reach an “unwritten” agreement, or they may attempt to get a resolution from a neutral third party.

Psychological contracts are important because they establish the expectations, rights, and obligations of both employees and employers. By clearly defining the roles and responsibilities of both parties, psychological contracts help to create a more positive and productive work environment. In addition, psychological contracts can help to prevent misunderstandings and conflict by providing a clear framework for communication and interaction.