Technological progression and fierce competition dominate the current dynamic business environment with challenges for firms in human capital engagement. One of the ways to overcome this is by focusing on the employee’s contracts for improved work behaviour. To address this, the study examines the effect of the psychological contract on innovative work behaviour for service sector employees, with leadership role as the motivating behaviour. Two hundred forty-eight participants from IT, ITES, telecom, banking and financial services, transportation and logistics, and education and training services responded to an online questionnaire. The research employed structural equation modelling using SPSS and AMOS for analysis. The study examines the mediation effect of leader–member exchange between transactional and relational contracts and innovative work behaviour; the paper deliberates on the results of transactional and relational contracts’ influence on leadership exchange and innovative work behaviour. The theoretical and managerial implications are presented, followed by the study’s limitations, and directions for future research are outlined.