In this article, we explore the dynamic, indirect effects of employment regulation through a qualitative study of three medium-sized enterprises and their ongoing, everyday employment relationships. Whereas owner–manager prerogative is generally associated with informality in small and medium-sized enterprises, we identify instances of formal policies and procedures implemented in response to regulation being instrumental in exerting this prerogative. Furthermore, employees reinforced this process by making judgements regarding the employment relationship in terms of their perceived informal psychological contract rather than external regulatory obligations. This article extends understanding of dynamic, indirect regulatory effects in relation to the interplay of informality and formality within psychological contracts in medium-sized enterprises.
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