The basic nature of employee-employer interaction is dictated by the nature of exchange in the employment relationship. An employment relationship is a contract based on a mutually agreed on, voluntary made exchange of promises. In this exchange, each party stands to gain if the exchange agreement is fulfilled and again, each party loses if it is not (Spielberger, 2008, p. 494)
A contract is always born from between the employer and employee when the employee agrees the terms of employment in which case the acceptance may entail paperwork or just a word of mouth. There are three elements to the contract: offer, an “acceptance,” and consideration, which typically takes the form of a “promise by the employee to perform services in exchange for the promise by the employer to pay for such services” (Reid and Standryk, 2004)
The employment relationship is usually documented in a contract of employment which can be a written statement contains certain terms and conditions regarding a given job. However, it necessarily does not have to be in writing, in which case it is called a psychological contract.
The basic indication of the existence of an employment contract is the consent of both the employee and the employer to fulfill their obligations, with the former willing to work with expectation of compensation from the latter. It is from this contract that the basis for the relationship between the two parties is drawn, with the contract giving both parties certain rights and obligations called contractual terms, which should complement the rights enjoyed under the statutory labor laws, for example, the right to paid annual leave.
Here, an introduction into the content and nature of the employment relationship is given, followed by a definition of the written contract of employment, expounding on the statutory rights, formation, and termination. In addition, the psychological contract of employment is discussed which includes its formation and breach.
The main difference between a written and psychological contract lies on how they are made such that, a written contract is always documented and provides duties and responsibilities in a generalized form, while psychological contract involves perceive obligation on the part of both employer and employee.
In this case, a written contract will require have specific wording regarding the responsibilities of either party as well as terms of the contract while a psychological contract will only entail reasonable judgement about responsibilities one should undertake.
According to Robinson (1996), Psychological contracts tend to be primarily subjective as they depend on what either party to the contract believes is contained in the promise, in which case both parties may have contradicting interpretation. On the other hand, written contracts are objective and clearly stated in the contract form such that both parties expect the same results from the contract.
Due to the uncertainty nature of the psychological contracts, it is always difficult to resolve disputes, more so because evidence of agreement may not be categorically substantiated unlike in written contracts where signed and formalized documentation cannot be ignored.
Psychological contracts are normally established informally through dialogue between the employer and employee on the role each of them can perform in the contract, without specifically outlining the details of the duties each party will perform.
In the case of written contracts, the contract document will contain explicit outline of duties and expectations of the contract, which must be signed by the both parties, thus acting as compete piece of evidence in the event a dispute arises. Although it is important to provide all employees with written contracts, some assignments such as freelancer may not need written contracts.
Breach of the psychological contract basically arises when either party to the contract feels that the other party has not fulfilled his obligation as promised. Since the magnitude of the breach may not be explicitly defined, the person who feels aggrieved will be affected psychologically and emotionally, with the response being loss of loyalty or loss of motivation, thus leading to general underperformance in the long run.
Worse still, unresolved breach of psychological contracts may prove costly especially if there interference with the firm’s reputation as perceived by outsiders (Robinson, 1996). On the other hand, breach of written contracts is easily quantified, especially where either party fails to meet expectations, while resolution for the same is always included in the contract form.
Formation of a written employment contract normally takes place upon the commencement of the contractual obligation, and according to the statutory requirement, the employer has the mandate to ensure the written contract form is provided to the employee not more than two months after the first day of employment. Therefore, any instance of holding the contract document, as is the case with some employers, is a violation of law, while the employee has the right to demand for the same without any form of intimidation.
Under the written contracts, terms and conditions of termination are explicitly stated, which in most cases may include lapse of time, mutual agreement, one party giving notice of termination or summary dismissal especially due to breach of terms. However, there are instances where legal redress may be sought especially when there is no ‘just cause’ for termination.
Employees’ perceptions of employer psychological contract fulfillment/breach provide the basis upon which employees reciprocate. The assumption made here is that employees have delivered on the terms of their exchange so that the basis for employer reciprocation (i.e. employer fulfillment of obligations) exists (Conway and Coyle-Shapiro, 2006).
One challenge arises on how to measure that the psychological contract has been breached, given that what one perceives as a breach may not necessarily appear as breach of contract to the other.
For instance, some changes in the behavior of the boss concerning the relationship with employees such as refraining from routine morning greetings or reverting to phone conversations instead of routine face to face discussions may appear as a breaking the psychological contract to the employee, but not to the employer. However, certain breaches of contract have far-reaching effect, thus should be addressed before they become detrimental to the firm.
Poor human resource policies are likely to cause breach of psychological contracts from the employee’s perspective. In some cases, employees will perceive a broken psychological contract when promises made by the employer about human resource practices do not add up to what is actually delivered (Conway and Briner, 2005, p. 65).
Employees require mentorship, guidance, and support from their boss while in the organization. Where such support is unavailable, employees feel that their social well-being is ignored and that the employer has failed to perform his part of psychological contract (Conway and Briner, 2005, p. 65).
The ever-changing business environment including competition in the labour market has forced organization to rethink their strategies, more so in human resources, with the primary aim being to improve employment relationship.
As a result of the dynamic climate, employment contractual relationships are becoming more and more threatened, while the hitherto security of tenure and reward for employee loyalty and performance is changing shape. Indeed, psychological contracts are becoming even more risky as most employers and employees alike are more likely to breach their part of bargain (Robinson, 1996).
Oftentimes, employees will perceive that employers have broken their contractual obligation and will always react through reducing their level of performance, changing the way they behave in the organization, and always seeking an opportunity to leave the firm for another.
The world of business is rapidly changing, especially with globalization bringing about integration of both commodity and labour markets on a global level.
In this case, competition has gone a notch higher, calling for organizations to restructure their internal resource policies, more importantly on human resources in order to attain a competitive advantage; indeed, organizations are “pressured to make rapid changes and accommodations to their workforce and employment policies” (Cappelli, 1999, Coffey, Cook, and Hunsaker, 1994).
Moreover, it is becoming important for employers to appreciate the role played by employees in organizations’ performance and must find a balancing act on how they must “manage, renegotiate, and in some cases, violate the psychological contract that they have established with their employees” (Rousseau 1995).
Nevertheless, it is paramount that organizations rethink on the effective way to fulfill their roles in psychological contracts in addition to formal written contract given that such contracts are almost inevitable, otherwise they will be always under financial and reputation risk.
Cappelli, P., 1999. The new deal at work: managing the market-driven workforce.
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Conway, N. and Briner, R. B., 2005. Understanding psychological contracts at work: a critical evaluation of theory and research. NY, Oxford University Press.
Conway, N. and Coyle-Shapiro, J. A. M., 2006. Reciprocity and Psychological Contracts: Employee Performance and Contract Fulfillment. London, WC1E 7HX, U.K. (online). Available from: http://filer.case.edu/bac2/MGMT413/groupl/reference%20papers/conway%20-%20reciprocity%20and%20psych%20contracts.pdf (Accessed October 13, 2010)
Reid, R. B. and Standryk, L. E., 2004. The Written Employment Contract. Lancaster. Brooks & Welch L.L.P. (online). Available from: http://www.lbwlawyers.com/publications/writtenemploymentcontract.php#establishing (Accessed October 13, 2010).
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Rousseau, D. M., 1995. Psychological contracts in organizations: understanding written and unwritten agreements. NJ, SAGE.
Spielberger, C. D., 2008. Encyclopedia of Applied Psychology. Volume 2. MO, Academic Press. (Online). Available from: http://books.google.com/books?id=UriYBuiH_FkC&pg=PA493&dq=KEY+DIFFERENCES+BETWEEN+WRITTEN+AND+PSYCHOLOGICAL+CONTRACTS+OF+EMPLOYMENT&hl=en&ei=TIi1TIuJBYqZOouYuJYG&sa=X&oi=book_result&ct=result&resnum=10&ved=0CFoQ6AEwCQ#v=onepage&q= (Accessed October 13, 2010).