A psychological contract is an economic and psychological concept that generally explains the relationship dynamics between a company and the workers. The basic concept can also be used to describe the dynamics in many kinds of relationships where people expect to mutually benefit from each other. On the simplest level, a psychological contract with an employer usually involves some set of expectations regarding the work that the employee is supposed to provide, while the employer is often expected to supply a particular work environment and some kind of security about the future. Whether or not an employee or employer feels comfortable with a psychological contract can have big implications for the work relationship going forward.
The first vestiges of the psychological contract are formed in the very early stages of the interview and hiring process. The employer and employee will generally both let each other know what they expect the future relationship to be like. In many cases, the employer might explain the kind of work the person can expect and may mention unwritten benefits that come with the job.
Once a person starts working for a company, he might discover that the real psychological contract is very different than the perception that was given in the interview. For example, the employer may have said that everybody at a company was expected to pull their own weight, but once the person starts working, it may become apparent that some people aren't doing their fair share, and the company might be allowing it without punishment. These experiences will usually change the person's perception of the psychological contract terms, and in these cases, perception often becomes reality.
Other changes to the psychological contract are also likely to occur because of alterations to the business. For example, if a company switches to a different product, that process will usually change many people's jobs in a variety of ways. As businesses change, the contract will normally evolve. Eventually, the changes may become large enough to make the employee or employer become dissatisfied with the whole relationship.
A psychological contract can also exist in other kinds of relationships. For example, two friends might have a relationship with a variety of underlying psychological expectations about certain things that they will provide for each other. When those ties of mutual benefit are broken, it is possible for a friendship built along these lines to suffer greatly.