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Psychological contracts are implicit understandings between employer and employee, distinct from formal economic agreements like wages. These contracts fall on a continuum from transactional (economic, short-term expectations like pay and promotion) to relational (emotional, long-term expectations like loyalty and job security). Employee benefits can fulfill both transactional and relational expectations, depending on how they are perceived.

Psychological contracts begin forming even before employment, during recruitment and selection, as candidates gather information about the employer. These contracts are flexible and evolve over time based on employee interactions and company practices. A violation of the psychological contract—when promises are perceived to be broken—can result in strong emotional responses, including betrayal and lost trust. Unmet expectations are not the same as violations; the latter triggers deeper negative consequences.

Clear communication and flexibility in employee benefit policies can help prevent psychological contract violations. Rising employee cost burdens—particularly with healthcare—have led to more perceived violations, reducing satisfaction and morale. The fairness and administration of benefits also impact how employees perceive their psychological contract with the organization.