Part 1 Changing Trend : The Traditional Psychological Contract


The remarks of here are my own personal opinion. I not not profess to be an expert. They are food for your thoughts. You are entitled to accept, reject or ignore them.


The basis of the psychological contract between employer and employee can be found in the Employer and Employee’s obligations in common law (angro-saxon law). Employment at will is practiced only in the United States.

There are of course variations depending on the laws of each country. However, the psychological contract is a subset of the social exchange theory, which is applicable to every communities and societies.

Contract of Service VS Contract for Service

“The contract of employment is a contract of service and not for service. Under a contract of service a man places his labour at the disposal of another and a relationship is constituted which in past days was called that of master and servant.

In the contract for services, on the other hand, a man who operates an independent business agrees to carry out a task for another and the relationship is that of employer and independent contractor.” Source: Charlesworth’s Mercantile Law, written by Clive M. Schmitthoff and David A.G. Sarre.

“One feature which seems to run through the instances is that under a contract of service a man is employed as part of the business; whereas under a contract for services his work, although done for the business, is not integrated into it but is only accessory to it” Lord Denning in the case Stevenson, Jordan & Harrison versus Macdonald and Evans (1952).

Mutual Co-Operation

Employment contracts are not simply financial agreements. There is an social and personal relationship that stems from an employment contract.

It is an implied term that both parties that both parties to the contract should facilitate the performance of their mutual obligations under it.The employee’s duty is to obey all lawful and reasonable orders of the employer.
However, during the employment relationship between the employee and the employer, the employer may not take advantage of the employee by exploiting employee or discriminating against employee.

Employees’ Implied Obligations

There are 2 implied duties of the employee:

(a) Fidelity Duty

• A skilled personnel cannot work for a rival firm in his spare time on similar work if the competition would seriously damage the employer’s business.
• Before and after termination of the employment contract, the employee cannot make use of confidential information which came to his knowledge during his employment.

(b) Duty of care

The employee must exercise reasonable skill and care in the performance of his duties. From this, the law has deduced an implied duty upon the employee to indemnify the employer in respect of the consequences of his negligent conduct.

Source: Charlesworth’s Mercantile Law, written by Clive M. Schmitthoff and David A.G. Sarre.

Employer’s Implied Obligations

There are 2 implied duties of the employer:

(a) Fidelity Duty

The courts have developed the notion that the employer owes the employee a general duty to preserve the trust and confidence that an employee should have in his employer, so that arbitrary and inequitable conduct by an employer may be regarded as a breach of this implied term, even if no express term of the contract is broken by the employer.

(b) Duty of care

The employer must take reasonable care for the safety of his employees in the course of their employment and in particular must provide safe tools, a safe place of work, a safe system of working and select properly skilled fellow employees.

Source: Charlesworth’s Mercantile Law, written by Clive M. Schmitthoff and David A.G. Sarre.

Employment at Will (Employees in United States)

Employees in the USA are divided into two classes:
• At-will employees.
• Just-cause employees.

An at-will employee in the USA can be terminated at any time, and for any reason or no reason at all and the US courts will generally not intervene to protect the former employee from allegedly unfair treatment by the employer.

Just cause employees can be dismissed from employment only for a good reason, such as poor job performance by the employee.

For Americans, you may want to visit Ronald B. Standler’s website on this topic. His website is Rachel Arnow-Richman examined in her paper “Mainstreaming Employment Contract Law: The Common Law Case for Reasonable Notice of Termination.” This was published in The Florida Law Review, article number 2, volume 66, issue 4.

“The United States is the only major industrial power that maintains a general employment-at-will rule. Canada, France, Germany, Great Britain, Italy, Japan, and Sweden all have statutory provisions that require employers to show good cause before discharging employees.” Source: Legal Dictionary, The Free Dictionary by Farlex.

Psychological Contract

Originally developed by organisational scholar Denise Rousseau, the psychological contract includes informal arrangements, mutual beliefs, common ground and perceptions between the two parties (Source: hrzone website). Descriptions and definitions of the Psychological Contract first emerged in the 1960s, notably in the work of organizational and behavioural theorists Chris Argyris and Edgar Schein (Source: businessballs website).

The psychological contract refers to the unwritten set of expectations of the employment relationship as distinct from the formal, codified employment contract. Taken together, the psychological contract and the employment contract define the employer-employee relationship. (Source: hrzone website).

The psychological contract is individual beliefs, shaped by the organization, regarding terms of an exchange between individuals and their organization. (Rousseau, 1995).

It concerns the idea of an exchange between parties. Individuals enter employment with a set of beliefs, expectations and obligations, which they anticipate being met by their employer. In addition the employer holds a reciprocal set of beliefs expectations and obligations leaving a binding exchange in place. Additionally, it is important to note that the psychological contract does not involve items found in the employment contract. Instead of objective and defined promises, it concerns more implicit, subjective and malleable ones.

At the heart of the psychological contract is a philosophy. It is not a process or a tool or a formula. The Psychological Contract is usually seen from the standpoint or feelings of employees, although a full appreciation requires it to be understood from both sides.

Simply, in an employment context, the Psychological Contract is the fairness or balance (typically as perceived by the employee) between:
• how the employee is treated by the employer, and
• what the employee puts into the job.
(Source: businessballs website)

Source: Presentation made by Dr Ioannis Nikolaou, Work & Organizational Psychologist, Associate Professor in Organisational Behaviour, Athens University of Economics and Business.

Social Exchange Theory

Some writers pointed out that there are similarities between psychological contract and the social exchange theory as both view exchange relationships as comprising of tangible and intangible resources governed the principle of reciprocity. Both parties in the relationship bring a set of expectations and obligations that they will provide in return for what they receive.

The key aspects of the social exchange are:

  • People help each other when there is a positive cost-benefit analysis, that is the benefits outweigh the costs.
  • The benefits can be tangible or intangible; physical or psychological. All that matters is that the person perceives the benefits to be greater than the costs and it would be for the long term. Both parties view the exchange relationships as comprising of both tangible and intangible resources governed by the norm of reciprocity. Both parties bring a set of expectations or obligations that they will provide in return for what they receive.
  • These writers believe that the norm of reciprocity plays an important role in the development of social exchange relationships by perpetuating the ongoing fulfillment of obligations and strengthening indebtedness.

My Personal Comments

In my personal opinion, the employer is always in a superior position compared with the employee. The equal positions of employer and employee laid out in common law does not align with reality. Some countries tries to correct this situation through legislations (laws) but the results has been mixed.

During the post war economic boom period when the world was not well connected, employees enjoyed life time employment and children were taught by their parents to go to school, then find a stable job when they graduate. The industrial revolution era had wiped out the medieval craftsman and apprenticeship and drawn farm labors to work in factories.

In the post war era, employees upheld the psychological contract. In my opinion, many employers took advantage of the situation. So it was common to see employees working long hours without additional compensation; employees being sent to work in a far flung corner of the world without their family; employees being employed in marine and construction industries where safety risks are high; husbands and wives working while they leave their children to child care centers.

When the millennials or Gen Y (born 1977 to 1995) and Gen X (born 1965 to 1976) entered the workplace and saw what their fathers and grandfathers, baby boomers (born 1946 to 1964) and traditionalists or silent Generation (born 1945 and before) had gone through, they became disillusioned. Many wished for their children, the Gen Z, iGen, or Centennials (Born 1996 and later) to strike out on their own so that they have more control over their personal lives.

Some Interesting Side Notes

In my opinion, when we enter this decade 2010 to 2020 of tumultuous change, the management tools that were developed during the stable post war period are no longer effective as they had were not developed for such a business environment.

The Hay Guide Charts (property of the Hay Group Guide Chart-Profile Method) are the central instrument of the proprietary point-factor job evaluation methodology developed by the Hay Group. The Hay Group was founded in 1943 in Philadelphia, Pennsylvania, USA by Edward N Hay. In other words, the job based compensation method came into being when the world was about to go into an era of post-war economic boom.

According to Wikipedia, “Daniel McCallum is credited for creating the first organizational charts of American business around 1954… In the 1920s a survey revealed that organizational charts were still not common among ordinary business concerns, but they were beginning to find their way into administrative and business enterprises…. The term “organigram” originates in the 1960s.” The period of the decline and decolonisation of the British Empire was 1945 to 1997.

In my opinion, there are 3 important figures that signal a change of industry trends are:

  • Simultaneous national increase in average employee turnover rate national and decline in employment tenure.
  • Increase national employment figures start to rise.

When we dig in by collecting and analyzing data, we will find that there is a shift in the job marketplace caused by technological change and this will not stop.

In Singapore, we are seeing an increase in the unemployment rate since 2015. Technological change has already affected newspaper business, arts galleries, book stores, antiques shops, mini supermarkets, and corporate air ticketing operators. The back end of banking operations would be automated.