The term 'psychological contract' can be traced back to the early 1960s. It tends to become more popular after economic downturns, for example the one of the 1990s and the more recent downturn after 2008. This may be because these are the times when people have more choice about the work that they do.
It can be defined as the perceptions of the parties involved in employment, employee and employer but also managers and the broader team, covering their mutual obligations towards each other. This covers such areas as promises and obligations and so it will often be informal and imprecise.
Events of the past may create the basis of the contract along with statements and promises made in the interview process and during performance appraisals. Essentially it deals with the day to day realities of the relationship between the employee and their employer.
Because the psychological contract is based on informal agreements it differs from an actual contract of employment and, in most cases, it will not be something that can be enforced by law. It covers such areas as trust and commitment. It is the psychological contract that tells the employee what is expected of them in terms of behaviour and, as such, it will influence them more in their day to day performance than their actual contract of employment.
Psychological contracts are often communicated by managers on an ongoing basis and they may change, so they are typically fairly unstable. As a contract they need to be accepted by employees, so they differ from instructions or, for example, training.
On the one hand the psychological contract is an ethereal concept that is hard to pin down. What is the relevance of it and why does it exist if it is unenforceable? However, it covers some very important behavioural areas, and it can be useful to treat it as one might a contract so that key influencers of behaviour can be focused on.