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Editorial Manager(tm) for Employee Responsibilities and Rights Journal
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Title: Creating Psychological and Legal Contracts through HRM Practices: A Strength of Signals
Perspective
Article Type: Research Articles
Keywords: psychological contracts; human resource management practices; signaling theory; legal
contracts
Corresponding Author: Dr. Patricia G. Martinez, Ph.D.
Corresponding Author's Institution: Loyola Marymount University
First Author: Mark M. Suazo, Ph.D.
Order of Authors: Mark M. Suazo, Ph.D.; Patricia G. Martinez, Ph.D.; Rudy Sandoval, J.D. L.L.M.
Abstract: Research on the psychological contract has primarily focused on the outcomes of
psychological contract breach, the content of the psychological contract, and antecedents of
psychological contract breach. Far less research has been conducted on the means by which
psychological contracts are created. In particular, this is the first paper to develop a theory for the
strength of signals generated through Human Resource Practices (HRM) as a means for creating a
psychological contract. Given that much of this recent psychological contract theorizing is influenced
by legal contract scholarship and adopts a promise-based perspective (e.g. Rousseau, 1989; 1995), we
compare and contrast psychological and legal contracts, and use this comparison to propose how the
strength of HRM-generated signals can create psychological and legally enforceable contracts. We
develop our propositions by drawing on theories from research on psychological contracts, signaling
theory, and scholarly work on legal contracts in the United States.
2
Creating Psychological and Legal Contracts through HRM Practices:
A Strength of Signals Perspective
Abstract
Research on the psychological contract has primarily focused on the outcomes of psychological
contract breach, the content of the psychological contract, and antecedents of psychological
contract breach. Far less research has been conducted on the means by which psychological
contracts are created. In particular, this is the first paper to develop a theory for the strength of
signals generated through Human Resource Practices (HRM) as a means for creating a
psychological contract. Given that much of this recent psychological contract theorizing is
influenced by legal contract scholarship and adopts a promise-based perspective (e.g. Rousseau,
1989; 1995), we compare and contrast psychological and legal contracts, and use this
comparison to propose how the strength of HRM-generated signals can create psychological and
legally enforceable contracts. We develop our propositions by drawing on theories from
research on psychological contracts, signaling theory, and scholarly work on legal contracts in
the United States.
Keywords:
psychological contracts, human resource management practices, signaling theory, legal contracts
3
Organizational science scholars have argued that the employee-employer relationship is
fundamentally governed by a variety of different types of contracts that can be categorized as
either psychological or legal in nature (Rousseau, 1995; Rousseau & Parks, 1993). Yet, research
on understanding contracts in this arena has predominantly focused on the psychological
contract. So much so, that consideration of legal contracts has taken the form of either an aside
or post script in much of the organizational studies research. For example, over the past two
decades there has been an explosion of research on the psychological contract that has primarily
focused on the content of the psychological contract (e.g., Parks, Kidder, & Gallagher, 1998;
Rousseau, 1990) and the outcomes of psychological contract breach (e.g., Bal, De Lange, Jansen,
& Van Der Velde, 2008; Deery, Iverson, & Walsh, 2006).
Interestingly, much of this recent psychological contract theorizing is influenced by legal
contract scholarship (e.g. Rousseau, 1989; 1995), yet theorists have given little if any
consideration to legal contracts (e.g., Roehling & Boswell, 2004; Suazo, Martinez, & Sandoval,
2009). Both the academic and practitioner communities have generally failed to consider the
variety of ways that employers may unwittingly create both psychological and legal contracts,
particularly through their HRM practices, and how these may subsequently impact employees’
work attitudes and behaviors. This paucity of research is understandable given the behavioral and
psychological approaches to scholarship in the organizational sciences. However, the result is
that while we are accumulating knowledge about psychological contracts in the organizational
sciences, we actually know very little about legal contracts with regards to the employee-
employer relationship. We address this shortcoming here by examining the role of human
resource management (HRM) practices in creating psychological and legal contracts.
4
Although there is no agreed upon definition of the psychological contract (Conway &
Briner, 2005), it has been defined generally either solely from the employee’s perspective, such
as “an individual’s beliefs regarding the terms and conditions of a reciprocal exchange
agreement between that focal person and another party” (Rousseau, 1989, p. 123), or both the
employee and employer’s perspective, “The perception of both parties to the employment
relationship, organization and individual, of the obligations implied in the relationship” (Herriot
& Pemberton, 1997, p. 45). In contrast, a legal contract is not based on beliefs, but rather, on a
meeting of the minds between the parties in the exchange process (Steinberg v. Chicago Medical
School, 1977). Thus, before proceeding, it is important to denote specifically what we mean by
legally enforceable contracts (legal contracts hereafter). The formation of legal contracts depends
on the country and/or jurisdiction, thus its definition is contextual as it may take on many forms
depending on the particular legal system of that country. Currently, the two major legal systems
in the Western world are civil and common law (Emerson, 2004). Under common law, a
contract is created when the elements of “offer, acceptance, and consideration” are present
(Simpson, 1965), while in civil law, the element of “consideration” is not necessary. In other
words, a contract can arise in civil law with only the elements of “offer and acceptance” being
present. Given these variations, it is important that any research which draws from contract law,
as our does, identifies the legal context in which it is based. For the purposes of this paper we
discuss legal contracts from the perspective of the Common Law System found in the United
States. The United States adopted the English form of common law as did Canada, Australia,
New Zealand and other former British colonies (Emerson, 2004). While similarities may exist
between legal contracts in the U.S. and legal contracts in other nations with a common law
5
system, any propositions developed here should be viewed within the context of the U.S. courts
system.
In sum, while limited research has examined the creation of psychological contracts
(Conway & Briner, 2005), even less research has been conducted on the formation of legal
contracts between employees and employers and their implications for behavior in
organizations. Our purpose is to integrate signaling theory (Rynes, 1991) to describe the
process by which Human Resource Management (HRM) practices produce psychological and
legal contracts. We also draw on the work of legal scholars, who have long recognized the
complexities inherent in the social construction of legal contracts.
By examining these issues, we will be addressing the call for research on factors that
determine psychological contracts (Conway & Briner, 2005), and adding to the limited amount
of literature and knowledge on legal contracts in the organizational studies domain. The nature
of this research calls for mesolevel theorizing (House, Rousseau, & Thomas-Hunt, 1995) since it
is necessary to consider individual level processes in conjunction with organizational features.
We begin with reviews of the literature on psychological contracts and legal contracts.
This is followed by a review of the literature on HRM practices and signaling theory. We follow
this with examples of HRM practices that create contracts in organizations and provide
propositions for contract creation through HRM practices. Finally, we conclude with a
discussion for future research on our theorizing. Our goal with this paper is to highlight the idea
that HRM practices can create multiple types of contracts between an employee and employer.
Psychological Contracts
Research on the psychological contract began in the 1960s when Argyris (1960),
Levinson, Price, Munden, and Solley (1962), and Schein (1965) described it as an unwritten
6
contract between the employee and employing organization that is a product of mutual
expectations. The idea is that the employee has expectations about issues such as pay, benefits,
and hours worked. Emphasis is placed on implicit expectations since explicit expectations are
generally conveyed through the formal employment contract. Likewise, the organization has
implicit expectations about issues such as employee loyalty, enhancement of the organization’s
image, and protection of proprietary information. The key point of this early conceptualization is
that although the psychological contact is unwritten, it is a powerful determinant of behavior in
organizations.
Research on the psychological contract did not progress much beyond the theoretical
discussions of the 1960s until Rousseau (1989) reconceptualized the construct. Rousseau’s
(1989; 1995) conceptualization moved away from the 1960s expectations based perspective to a
promise based perspective. Her perspective was largely influenced by legal scholarship (i.e.,
Macneil, 1974; 1985) which states that contracts are promissory in nature, and arise from an
offer (Sunburst Oil & Gas Co. v. Neville, 1927), acceptance of the offer (Boulton v. Jones, 1857),
and consideration (e.g., payment for services) (Eliason v. Henshaw, 1819). Hence, Rousseau
(1989: 123) defined the psychological contract as
an individual’s beliefs regarding the terms and conditions of a reciprocal
exchange agreement between that focal person and another party. Key issues here
include the belief that a promise has been made and a consideration offered in
exchange for it, binding the parties to some set of reciprocal obligations.
A second major departure from the 1960s thinking on psychological contracts was
Rousseau’s (1989) idea that psychological contracts reside solely in the minds of employees, and
therefore organizations do not have psychological contracts. This idea, in conjunction with her
7
notion of the promissory nature of the psychological contract, paved the way for empirical
research on the construct. Rousseau’s conceptualization moved the discussion away from an
idea that was theoretically interesting, but difficult to operationalize, to an idea that could be
converted into testable hypotheses using traditional research methods (e.g., survey based
research).
Research on the psychological contract has primarily focused on the outcomes of
psychological contract breach (Zhao, Wayne, Glibkowski, & Bravo, 2007), where psychological
contract breach (PCB) is defined as an employee’s perception of having received less than what
was promised by the organization (Rousseau, 1989; Morrison & Robinson, 1997). The general
conclusion is that psychological contract breach leads to a host of negative attitudes and
behaviors on the part of the employee (see Zhao et al.’s (2007) meta-analysis). For example,
PCB has been found to be negatively related to trust in the employer (Deery, et al., 2006;
Robinson, 1995; Robinson, 1996), job satisfaction (Sutton & Griffin, 2004; Tekleab & Taylor,
2003), organizational commitment (Bellou, 2008; Lester, Turnley, Bloodgood, & Bolino, 2002;
Robinson, 1995), in-role performance (Johnson & O’Leary-Kelly, 2003; Suazo, Turnley, & Mai-
Dalton, 2005), and organizational citizenship behaviors (Bellou, 2008; Lo & Aryee, 2003;
Restubog & Bordia, 2006).
The second most studied issue, though limited in number, has been the content of the
psychological contract (Conway & Briner, 2005). The content of the psychological contract has
been defined as the employee’s beliefs regarding the promises he/she has made and the
employee’s perception of the promises made to him/her by the organization (Rousseau, 1990).
This line of research has focused on a subset of employee perceived promises that are believed to
be important to most employees. The result is a list of over 50 items that comprise the contents
8
of the psychological contract (Conway & Briner, 2005). For example, content items include:
financial inducements (e.g., pay, overtime, subsidized health and fitness programs), family-
oriented support (e.g., child care, spousal employment), and general support (e.g., promotion,
training, benefits, loyalty, vacation leave) (Guzzo, Noonan, & Elron, 1994; Herriot, Manning, &
Kidd, 1997; Rousseau, 1990). Interestingly, although the contents of the psychological contract
have received some attention, there have been few studies (e.g., Lucero & Allen, 1994; Sims,
1994) that have examined the means by which the contents come about (Conway & Briner,
2005). In this paper we address this issue through the examination of HRM practices that signal
the creation of psychological contracts. Following Rousseau and Parks (1993) and Rousseau
(1995), which argue that contracts, either psychological or legal, govern the employer-employee
relationship, we next turn to discussing the various forms of legal contracts.
Legal Contracts in the United States
The origins of legal contracts date back to the days of bartering. The concept of legal
contracts originated in Roman civil law and was adopted by a number of countries such as
France and Spain. Spain introduced it to conquered territories such as Mexico, Central America,
and South America. Although Roman civil law influenced contract thinking on many continents
and in many countries, it never took hold in England. In England the basis for contract thinking
was and is common law, which is the notion that judges make legal decision based on the
doctrine of Stare Decisis or precedent. The English form of common law was adopted by the
United States and serves to this day as the basis for contract decisions in the legal courts of the
United States.1
1 This paragraph contains a very brief historical description of legal contracts that does not include the details and
intricacies of the development of contractual thinking over the centuries. The intent of this paragraph is to provide a
backdrop for the reader to understand contracts in the United States. Readers interested in the history and details of
contracts are encouraged to refer to Farnsworth (1982).
9
Simply stated, a contract is a promise or a set of promises for which the law gives a
remedy upon a manifestation of a breach (Restatement of Contracts, 1979). The promise is said
to be unequivocal such that the person making the promise knows that a legal commitment has
been made to another person or entity (Sandoval, 2008). Contracts can be categorized into either
express contracts or implied contracts. Express contracts are either written or oral. It is one in
which all of the elements (offer, acceptance, and consideration) of the contract are explicitly
manifested either in writing or orally (Simpson, 1965). Implied contracts, on the other hand, are
ones in which the court may imply the existence of a contract by the actions or inactions of the
parties. Implied contracts are of two types: quasi-contract or promissory estoppel.
Fundamental Elements of an Enforceable Legal Contract
The fundamental elements of an enforceable legal contract are comprised of (a) an offer
(Sunburst Oil & Gas Co. v. Neville, 1927), (b) an acceptance of the offer (Boulton v.
Jones,1857), and (c) consideration (i.e., something bargained for and given in exchange for the
promise) (Eliason v. Henshaw, 1819). These three elements are necessary for the manifestation
of a legally binding contract (Lucy v. Zehmer, 1854). For example, the issues of offer and
acceptance were determined in the case of Hunt v. Jeffries (1941). Here the defendants
(employer) denied workmen’s compensation to the heirs of the deceased employee because the
employer alleged that an employment contract was never formed between the employer and the
employee. The defendant argued that the employee was offered a job as an ironworker but that
the employee died and never appeared on the job and never communicated his acceptance to the
employer, therefore, there was no acceptance of the offer and therefore, there was no contract.
The court stated that “an offer requires a reciprocal promise. It is clear that mental determination
to accept is insufficient to bind the party who makes the offer. To constitute acceptance of such
10
an offer, there must be an expression of the intention, by word, sign, writing, or act,
communicated or delivered to the person making the offer or his agent.” Since the employee died
and never appeared for work, he never accepted by “word, sign, writing or an act.” Therefore,
since there was no acceptance by the employee to the offer, there was no contract and the court
ruled that the heirs were not entitled to the deceased workmen’s compensation.
With respect to the third element of contracts, the court stated in Ott v. Dimond (2008)
that it is a fundamental rule of the law of contracts that every contract must be supported by
consideration. Consideration may consist of some right, interest, profit, or benefit that accrues to
one party, or, alternatively, of some forbearance, loss, or responsibility that is undertaken or
incurred by the other party (Ott v. Dimond, 2008). In this case the employee and a previous
president of the employer signed a document providing for a 25-year term of employment that
was terminable only for good cause. When the previous president died, his sons inherited his
company. One of the sons then became the president and subsequently terminated the employee.
The court held that the employment contract was not binding on the employer because it did not
identify any consideration other than continued employment, which was insufficient
consideration for a contract (Ott v. Dimond, 2008).
Implied Contracts
An implied-in-fact contract is a contract which is formed by a court resulting from the
parties' conduct. Unlike written and orally expressed contracts, the parties' intent and mutual
assent to an implied-in-fact contract is proven through conduct rather than words. An agreement
implied in fact is founded upon a meeting of minds, which although not embodied in an express
contract, is inferred, as a fact, from conduct of the parties showing, in light of the surrounding
circumstances, their tacit understanding to be bound by contract (Chase Manhattan Bank v.
11
Iridium Africa Corporation, 2002). The term implied in fact contract, only means that the parties
had a contract that can be seen in their conduct rather than in any explicit set of words. In
contrast, a contract implied in law is not the product of an agreement between the parties but is
imposed by law to prevent unjust enrichment of a defendant when he should not be permitted to
retain a benefit that he has received from plaintiff (Whitfield v. Gilchrist, 1997). For example, in
Brodie v. General Chemical Corporation (1997) a former employee brought a “court action
against his employer alleging that the termination of his employment constituted a breach of an
implied contract formed by the employee handbook and a standard operating procedures manual,
and that the employers attempted unilateral revocation of these rights found with those
documents before the employee was fired was not effective.” The court ruled that, under
Wyoming law, the employer was required to “give additional consideration when it modified the
implied job security provision in appellant employees' handbook to restore them to at-will status”
otherwise the revocation would constituted a benefit to employer, and a detriment to employee
(Brodie v. General Chemical Corporation, 1997).
Quasi-contracts. There are two types of implied contracts, quasi-contracts and contracts
created by promissory estoppel. A quasi-contractual obligation is wholly unlike an express or
implied-in-fact contract in that it is imposed by law for the purpose of bringing justice without
reference to the intention of the parties (Brodie v. General Chemical Corporation, 1997). A
quasi-contract is a type of implied contract that is intended to prevent injustice or unfairness
against the injured party, and an unjust benefit to the non-injured party (Sandoval, 2008). The
right to recover on the theory of quasi-contract is governed by principles of equity. It is based on
the idea that a person shall not be allowed to enrich himself unjustly at the expense of another.
Therefore, the court will usually grant a quasi-contract to avoid injustice or unfairness in an
12
implied contractual transaction. (Gate City Savings and Loan Asso. v. International Business
Machines Corp., 1973). For example, in Industrial Lift Truck Service Corporation v. Mitsubishi
International Corporation (1982), Industrial entered into a dealership contract with Mitsubishi.
Industrial Lift Truck made substantial improvements on the trucks to make them marketable in
the United States. After Industrial had established a successful selling program with the modified
trucks, Mitsubishi gave 30 days notice to Industrial and cancelled the contract. Industrial then
brought a suit alleging, among other issues, that Mitsubishi had benefited from the modifications
and selling of the trucks, and further, that Industrial would be injured and injustice would result
if the court did not impose a quasi-contract on the parties binding Mitsubishi to the contract.
While Industrial proved all the prerequisite elements to be granted a quasi-contract, the court
nevertheless ruled that a quasi-contract was not appropriate in this case because there existed an
underlying express contract between the parties whereby they had previously agreed to terminate
the contract between them provided they give proper notice. The court concluded that it could
not deny an express contract and impose a quasi-contract in its stead.
Promissory estoppel. The second type of implied contract is a contract by promissory
estoppel. Promissory estoppel comes into play in situations where actual consideration is not
present because consideration is a necessary element of a valid contract (White v. Roche
Biomedical Laboratories, 1992). To establish a claim for promissory estoppel, a plaintiff must
prove that (a) a defendant made an unambiguous promise to the plaintiff, (b) the plaintiff relied
on such promise, (c) the plaintiff's reliance was expected and foreseeable by defendants, and (d)
the plaintiff relied on the promise to its detriment (Newton Tractor Sales v. Kubota Tractors
Corporation, 2009). In essence, this type of recovery is available even though there is no actual
contract between the parties (Newton Tractor Sales v. Kubota Tractors Corporation, 2009). For
13
example, in White v. Roche Biomedical Laboratories (1992) the plaintiff filed an action
contending he had entered into a contract of employment with Roche Biomedical based upon his
acceptance of a job offer. The plaintiff alleged that the consideration was his reliance on Roche’s
promise to hire him in addition to his resignation from his former job. He contended that Roche
breached this contract by failing to hire him. Roche, on the other hand argued that (a) the offer
was conditional and that the plaintiff did not fulfill the condition; and (b) if a contract existed, the
contract was terminable at will. The plaintiff responded to this motion with a promissory
estoppel argument. The plaintiff argued that the job offer was an (a) unambiguous promise, (b)
that he relied on the promise by Roche to hire him and that he resigned his former job based on
the Roche’s promise and he subsequently moved to the employer’s location, (c) that his reliance
on the promise was expected and foreseeable by Roche, and (d) that he relied on Roche promise
of the job offer to his detriment. Therefore, the plaintiff argued that the court should enforce the
contract by promissory estoppel. However, in this case, the plaintiff was relying on a promise
based on an at-will employment contract and the court ruled that the employer could terminate
the contract at will. Having briefly reviewed psychological and legal contracts, we now discuss
how HRM practices may signal their formation.
Human Resource Management Practices and Contracts
Research on the impact of human resource management (HRM) practices on
psychological contracts began in earnest in 1994 with the publication of a special issue on
psychological contracts in Human Resource Management. Topics of the special issue included
the role of HRM in clarifying psychological contracts (Sims, 1994), employee benefits as a
source of psychological contract violation (Lucero & Allen, 1994), and the meaning of HRM
practices in terms of a psychological contract (Guzzo & Noonan, 1994). Since then, researchers
14
have explored a variety of HRM practices as they relate to psychological contracts and in
particular, breach of the psychological contract. HRM practices that have been studied include:
performance management (Stiles, Gratton, Truss, Hope-Hailey, & McGovern, 1997), part-time
versus full-time HRM practices (David, 2005), and job security (King, 2000; Martin, Staines, &
Pate, 1998). The general conclusion is that numerous HRM practices can lead to the perception
of psychological contract breach (Zhao et al., 2007).
Given the breadth of topics covered in the research on HRM practices as they relate to
psychological contracts, it is interesting to note that researchers have essentially ignored
examining the means by which psychological contracts are formed. As stated earlier, research
has examined the content of the psychological contract (e.g., Guzzo, et al., 1994; Herriot, et al.,
1997; Rousseau, 1990) but not the mechanisms for determining those contents. Similarly,
organizational scholars have not examined the means by which HRM practices can create legal
contracts. Instead, organizational scholars have abdicated that research to the realm of legal
scholarship. We hope to expand research in the organizational sciences by examining the means
by which HRM practices create psychological and legal contracts.
Signaling Theory
The signaling hypothesis (Spence, 1974; Thurow, 1975) proposes that employers will
rely upon surrogate or proxy measures to signal information about an individuals’ learning
ability. For example, Bills (1988; 2003) argues that employers assume that education is related
to productivity or socioeconomic success and that educational credentials signal a certain
capability. In some cases, this signal may be weighed heavily as employers may pay highly for
that educational level despite poor job performance, yet in other cases, they may adjust pay
based on observed performance. For example, in positions where the applicant will undergo
15
required specialty training, such as resident physicians, employers may seek the applicant with
the best learning ability (Semeijn, van der Velden, Heijke, van der Vleuten & Boshuizen, 2005)
and they may rely upon education as a signal of an individual's underlying learning ability.
Drawing from Spence (1973, 1974) and Thurow’s (1975) work on job market signaling,
organizational scholars (Rynes, 1991; Wanous, 1982) argue that applicants use signals from
employer representatives and organizational attributes to screen out those employees less
appealing to them. Since applicants do not have perfect information about the organization, they
rely upon these signals to draw conclusions about an organization’s intentions, actions, and
characteristics (Rynes, 1991). Empirical research supports the idea of signaling theory. For
example, studies have found that job applicants view a variety of workplace variables such as
recruiter characteristics or behaviors (e.g., Rynes, 1991; Turban, Forret, & Hendrickson, 1998),
recruitment activities (e.g., Turban, 2001, Turban, Campion, & Eyring, 1995), organizational
characteristics (e.g., Cable & Judge, 1994; Lievens, Decaesteker, Coetsier, & Geirnaert, 2001),
and organizational policies (e.g., Aiman-Smith, Bauer, & Cable, 2001; Williams & Bauer, 1994)
as signals of what it is like to work for an organization. Key to the issue of signaling theory is
that the perception of organizational signals on the part of the applicant is highly perceptual and
subjective in nature (Goldberg & Allen, 2008).
Creating Psychological and Legal Contracts Through HRM Practices
In this section of the paper we tie together what we have presented about psychological
contracts, legal contracts, HRM practices, and signaling theory to examine the ways that HRM
practices can create psychological and legal contracts in organizations. Due to the complexity of
HRM practices and the complexity of the interpretation of legal contracts by the courts, we will
limit our discussion of the creation of contracts to a very narrow subset of HRM practices (i.e.,
16
employee handbooks). By doing so we will provide specific examples for illustrative purposes
and at the same time, generate propositions regarding the means by which HRM practices may
signal the creation of psychological and legal contracts. Our premise is that while the creation of
psychological contracts is inevitable, organizations may be unwittingly also creating legal
contracts as a result of their HRM practices.
Employee Handbooks
Most organizations create employee handbooks in order to relay information and
guidelines to employees (Johnson & Gardner, 1989). Although employee handbooks are not
intended to create contracts, they often do (Bennett-Alexander & Hartman, 2007; Schmedemann
& Parks, 1994). In particular, employee handbooks typically contain an abundance of
information that employees may rely upon as they create their psychological contract with the
organization (Schmedemann & Parks, 1994). In addition, in certain circumstances, employee
handbooks can create legally binding contracts between the employee and organization
(Toussaint v. Blue Cross and Blue Shield of Michigan, 1980).
In order to consider the means by which contracts are formed through employee
handbooks, it is necessary to examine the language that creates contracts, in our case English.
Generally speaking, the English language is said to be inherently ambiguous (Clampitt, 1991).
One of the primary reasons for the ambiguity is the way words are defined. In most cases, words
have multiple definitions. The resulting number of permutations is mind boggling. Consider the
500 most commonly used words in the English language. Research has found that there are
approximately 14,000 different definitions for these words (Haney, 1979). Therefore,
miscommunication can occur quite easily.
17
Given that an employee handbook is an important source of information generated by
HRM departments, it is critical that those drafting the handbook pay particular attention to the
words chosen to convey an organization’s policies and employee rights and responsibilities
(Johnson & Gardner, 1989). This is not to say that the drafters of employee handbooks should
entirely steer clear of ambiguous words or statements. In some instances HRM departments may
want to use ambiguity as a strategy to preserve future options (Eisenberg, 1984). However, for
the most part, definite and unambiguous terms will serve an organization well in terms of
establishing a well defined employee-employer relationship (Demasse v. ITT, 1997).
Linguistic Cues and the Signals They Convey
We argue that linguistic cues, such as the clarity and strength of words, signal whether an
employee has either a psychological or legally enforceable contract. Generally speaking, the
more vague the linguistic cues are, the more likely they will signal a psychological contract, and
the more definite the linguistic cues are, the more likely they will signal a legally enforceable
contract. In order to understand these differences, it is necessary to understand the way the
courts in the United States view language as it relates to contract creation. The courts draw a
clear distinction between vague and clear language such that the courts are more likely to enforce
a contract with clear and unambiguous language than a contract that is indefinite and imprecise
(Krumme v. Westpoint Stevens, 1979). In addition, the courts are likely to consider verb strength
as an indicator of contract creation. Verb usage in handbooks such as “we generally try” would
be considered weak, whereas “we shall” would be considered strong verb usage that might create
legally binding contracts (Schmedemann & Parks, 1994).
Many legal cases can be used as examples to illustrate the differences between
psychological and legal contracts. Because we are interested in contract creation as a result of
18
statements made in employee handbooks, we present a representative case to illustrate our point.
For example, in Whittaker v. Care-More the plaintiffs were discharged from their jobs at the
defendants’ Monterey nursing home. They filed an action alleging that they were discharged
without “good cause” in “breach of an implied contract for an indefinite term.” The defendant
alleges that the state of Tennessee is an employee-at-will state, that the employees are at-will-
employees, and that the defendant can discharge the plaintiffs at-will without cause. The
plaintiffs argue that the language in the employee handbook provides reasonable assurance of
employment and therefore may not be terminated without cause. They claim that the employee
handbook implied a specific term of employment. The handbook says:
“An employee may reasonably expect uninterrupted employment year in and
year out. Any employee doing his work in a satisfactory manner and working for
the good of the organization has little to fear about job security.”
The court reasoned that the words reasonably, satisfactory, and for the good of the organization
were too vague and ambiguous to have created a legally enforceable contract for job security.
The offer had to be clear, definite, and explicit. In this case, the vague and ambiguous language
of the employee handbook transmitted a weak signal regarding job security. Therefore, the
employee handbook created a psychological contract and not a legally enforceable contract.
The Implications of Weak and Strong Signals
For the sake of parsimony we limited our discussion of the ways HRM practices create
psychological and legal contracts to the language found in handbooks. Obviously, there are
numerous other forms of HRM practices (e.g., recruiting, selection) that could generate the weak
or strong signals for creating a contract. For example, there are a variety of scenarios in the
recruitment process whereby either a psychological or legal contract is created as a result of
19
employee or employer statements. Consider the case of Gunthorpe v. DaimlerChrysler (2004).
In that case the plaintiff (i.e., Gunthorpe) filed a lawsuit for wrongful termination based on his
belief in a contract for lifetime job security. Gunthorpe alleged that he believed he would be
employed by DaimlerChrysler until his retirement. He explained that this belief came about as a
result of the interview process where he told the DaimlerChrysler recruiter that he expected to be
employed by DaimlerChrysler until the day he retired. During the interview process
DaimlerChrysler did not make any promises about job security. The court ruled that
Gunthorpe’s claim was unenforceable because expectations are not part of contractual
agreements. This is a case where the signals from the HRM practices were so weak (e.g.,
DaimlerChrysler did not send any signals about job security during the interview process) that at
most Gunthorpe could have claimed to have a psychological contract with DaimlerChrysler.
Next consider the scenario where during recruitment the employer makes statements
about the candidate becoming permanently employed or statements regarding an annual salary
(e.g., “If you are hired, you will receive an annual salary of $80,000.”) In many instances courts
have deemed these types of statements sufficiently strong to signal the creation of a contract
which may be express or implied (quasi-contract or promissory estoppel). In cases where the
employee was terminated before the end of the contract year, other than for good cause, many
courts have held that the employer is liable for the salary that is due through the year’s end
(Bennett-Alexander & Hartman, 2007).
In sum, our review of the psychological contract literature, case law on contracts, HRM
literature, and signaling theory leads us to the following conclusions. The ambiguity of weak
signals can result in the perception of illusory promises in the minds of employees. Hence, weak
signals that result from HRM practices can lead to the creation of a psychological contract
20
because the elements (i.e., beliefs, perceptions) that created it are optional, discretionary, and
indefinite. In contrast, HRM practices that result in strong signals to the employee about the
nature of his/her relationship with the employer are capable of generating unequivocal promises.
Hence, strong signals that result from HRM practices can lead to the creation of legal contracts
because the elements of contract creation (i.e., offer, acceptance, consideration) are clear,
definite, and unambiguous. Therefore, we offer the following:
Proposition 1: HRM practices that generate weak signals about the terms and
conditions of the employee-employer relationship lead to the creation of a
psychological contract.
Proposition 2: HRM practices that generate strong signals about the terms and
conditions of the employee-employer relationship lead to the creation of a legal
contract.
Discussion
As HRM has evolved both as a managerial function and as an academic discipline, there
has been less emphasis placed on “personnel administration” and more emphasis placed on the
“behavioral” aspects of HRM (Jackson, Schuler, & Rivero, 1989). The behavioral view suggests
that effective HRM strategies will acquire, develop, and motivate employees to enhance firm
performance (Jackson et al., 1989; Pfeffer, 1994; Schuler & MacMillan, 1994). Inherent in this
view is the idea that employee perceptions of issues such as compensation, the recruitment
experience, performance reviews, and promotions are the basis for an employee’s understanding
of the terms and conditions of his/her employment relationship (Rousseau & Grellar, 1994). We
argue that these perceptions, given the particular circumstances, can create either psychological
contracts or legal contracts between the employee and employer.
21
We have proposed means by which HRM practices can signal the creation of
psychological and legal contracts. By juxtaposing case law with the findings from the research
on psychological contracts, HRM practices, and signaling theory, we make a contribution to
contractual thinking in the organizational sciences. In particular, we highlight the need for
organizations to consider the strength of the signals that HRM practices send as they relate to
contract creation.
In our review of the literature for this paper, we found that only two researchers
(Rousseau, 1995, 2004; Sparrow, 1998) have alluded to, or implicitly described the role of
signals in their discussions of psychological contracts. Both Sparrow (1998) and Rousseau
(1995, 2004) present models, whereby social cues are described as elements involved in the
creation of psychological contracts. Sparrow’s (1998) model takes a cross-cultural perspective
on social cues, while Rousseau’s (1995) model takes an organization-wide perspective on social
cues. Sparrow argues that cues generated from national cultures are the reasons that the terms
and conditions of psychological contracts are likely to vary from country to country. Rousseau
(1995) maintains that managers, coworkers, and work groups cue the terms and conditions of the
psychological contract. In addition, Sparrow and Rousseau actually use the term “signal” in
some of their examples of social cues. For instance, in her discussion of managers as the most
important sources of information for psychological contract creation, Rousseau (2004, p.124)
states that “managers can tailor their recruitment efforts to signal broader (more numerous and
munificent) terms in their psychological contracts with new workers.”
Although Sparrow and Rousseau use the term “signal” in some of their examples as it is
intended by signaling theorists (i.e., Rynes, 1991; Wanous, 1992), they do not provide the
background for their use of the term. For this reason there is some ambiguity as it relates to their
22
use of the term “signal.” Their use of the term seems to be intuitive rather than theoretically
derived. In addition, Sparrow and Rousseau do not discuss the reasons why employees use cues
or signals to create their psychological contracts. In contrast, we explicitly use signaling theory
(i.e., Rynes, 1991; Spence, 1973, 1974, 2002; Wanous, 1982) as a means for understanding
contract creation (either psychological contracts or legal contracts). By doing so, we build on the
research of Suazo et al. (2009), where they present a framework for understanding contract
creation through signaling theory.
Suazo et al. (2009) propose that employees rely on cues and signals to create contracts.
That is, individuals use cues or signals to draw conclusions about the organization’s intentions,
actions, and characteristics because they have incomplete information about the organization
(Rynes, 1991). They describe generally how several HRM practices (e.g., recruitment, training,
compensation) may signal the creation of psychological or legal contracts. We have built on
their research by introducing the idea that the strength of the signal delivered by an HRM
practice determines the type of contract created between the employee and employer.
Specifically, we assert that weak signals generated through HRM practices are likely to create
psychological contracts and strong signals that are generated through HRM practices are likely to
create legal contracts.
Directions for Future Research
Future research which considers the role of HRM in the creation of psychological and
legal contracts would likely benefit from examining the impact of both structural signals (e.g.,
formalized HRM practices) and organizational representative (e.g., recruiters, managers) signals.
This is particularly true at the recruitment and selection stages of employment. It is at these
stages when the job applicant faces the most uncertainty about the organizational environment
23
and thus is particularly likely to rely on HRM signals for contract creation. Job applicants will
rely heavily on the structural elements of an organization’s HRM practices to serve as the
foundation for their psychological contracts and in some cases for legal contracts. Examples of
the types of HRM structural elements that are relevant for future research include compensation
policies (e.g., merit pay, profit sharing), promotion policies (e.g., ability, seniority), coordinating
functions such as span of control (e.g., tall hierarchies, flat hierarchies), rewards for productivity
gains (e.g., bonuses, Scanlon plan), and level of empowerment (e.g., self-managed teams, cross-
functional teams). These HRM structural attributes are likely to send signals to job applicants
about the working conditions they will face and the work life they can expect if they are hired by
the organization (Backhaus, Stone, & Heiner, 2002). Hence, the question to be answered
through future research in this area is what does an employee’s perception or understanding of
HRM practices or policies do to form psychological and legal contracts?
Not withstanding the formal HRM practices and policies, in many cases, it is any number
of organizational representatives (e.g., coworkers, immediate supervisors) that can convey and
implement an organization’s HRM practices. This is a common occurrence in contemporary
organizations because although HRM policies and practices may be centrally managed, their
implementation is often decentralized, given that supervisors often implement many human
resource practices. For example, while the organization develops a particular performance
appraisal process and system, direct supervisors usually evaluate employees’ performance,
document it and provide employees with feedback. Furthermore, Rousseau & Greller (1994)
argue that HRM practices are localized through manager-employee conversations.
The fact that multiple organizational agents are involved in implementing HRM policies
adds to the complexity of understanding the signals that create contracts in organizations. In
24
addition, the type of individual occupying a particular role affects signal interpretation. For
example, upon contact with an organization, job applicant’s perceptions are immediately
influenced by the actions of recruiters. However, the level of influence is likely to vary
depending on who is doing the recruiting. Consider the two broad categories of recruiters in
organizations: (1) functional representatives, and (2) HRM staff recruiters. Prior research on
recruitment (Rynes, Bretz, & Gerhart, 1991, p. 514) indicates that “functional representatives
have a bigger impact” on job applicants in terms of the signals that are sent about unobservable
organizational characteristics than HRM staff recruiters. Research also indicates that functional
representatives are better liked by job applicants than HRM staff recruiters (Fisher, Ilgen, &
Hoyer, 1979: Rynes et al., 1991). These findings may serve as the basis for exploring the idea
that the amount of influence of an individual might also signal the type of psychological contract
(e.g., transaction, relational) or legal contract (e.g., express, implied).
Overall, our propositions shed light on the importance of considering not only the signals
that HRM practices can generate to create contracts, but also the practical relevance of
considering the strength of signals as they relate to the creation of psychological or legally
enforceable contracts. Our theorizing helps to explain the inevitability of psychological and in
some cases legal contract creation through HRM practices. These ideas present a fruitful avenue
for future research as they have not been empirically examined. If our theorizing is supported by
empirical research, it has the potential make a contribution to the practice of managing the
creation of psychological and legal contracts.
25
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Creating Psychological and Legal Contracts through HRM Practices:
A Strength of Signals Perspective
Mark M. Suazo 1
University of Texas at San Antonio
(210) 458-4318 phone
(210) 458-4783 fax
mark.suazo@utsa.edu
Patricia G. Martínez 2
Loyola Marymount University
(310) 338-1960 telephone
(310) 338- 3000 fax
patricia.martinez@lmu.edu
Rudy Sandoval 3
University of Texas at San Antonio
(210) 458-5295 phone
(210) 458-5783 fax
rodolpho.sandova@utsa.edu
1, 3 Department of Management, College of Business, University of Texas at San Antonio
One UTSA Circle San Antonio, TX 78249-0634
2 Department of Management, College of Business Administration, Loyola Marymount
University, Los Angeles, CA
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