Laws and Policies in Iceland

Employment Contracts in Iceland

Employment relationships are governed by Icelandic labour laws and collective bargaining agreements, which set minimum standards for most industries.

Contract Requirements

Employment contracts must be in writing and include:

• Employer and employee information
• Job title and responsibilities
• Place of work
• Salary in ISK
• Working hours and overtime rules
• Leave entitlements
• Notice period
• Probation terms
• Reference to applicable Collective Bargaining Agreement (CBA)

Types of Contracts

• Indefinite-term contracts – standard and most common
• Fixed-term contracts – must be justified and limited
• Part-time contracts
• Remote or hybrid work arrangements

Probation

Commonly 1–3 months, depending on industry and CBA.

An EOR ensures contracts align with Icelandic law and applicable CBAs.

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Working Hours in Iceland

Standard working hours are established by law and collective agreements:

• 40 hours per week (typical norm)
• Many CBAs reduce weekly working hours slightly over time

Overtime

• Overtime is strictly regulated and paid at premium rates
• Typical overtime pay: 1.0385× to 1.375× standard wages for extra hours
• Work on public holidays and nights may have higher premiums

Rest Requirements

• Employees must receive 11 consecutive hours of daily rest
• Weekly rest must be at least one day (24 hours)

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Employee Leave in Iceland

Annual Leave

Standard annual leave is:

• 24 working days minimum
• Many CBAs increase this to 27–30 days based on seniority

Leave is calculated in “working days” (where one week = 5 days).

Sick Leave

Entitlements depend on length of service and CBA. A typical structure:

• Employer pays full salary for 2 days per month during first year
• Benefits increase significantly after 1, 3, and 5 years of service
• After employer-paid entitlement ends, unions provide sickness funds

Maternity, Paternity & Parental Leave

Iceland offers one of the world’s most generous parental leave systems.

Total parental leave: 12 months, split as:

• 6 months for the mother
• 6 months for the father
• Parents may transfer up to 1 month to each other

Government pays parental leave benefits based on average salary.

Public Holidays

Iceland observes 16+ public holidays, including:

• New Year’s Day
• Easter (several days)
• Labour Day
• Independence Day
• Christmas and holiday period

Holiday work must be compensated with premium pay.

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Employee Benefits in Iceland

Social Security Contributions

Both employers and employees contribute to Iceland’s extensive welfare system.

Employer Contributions (varies by municipality)

Approximately 6.0%–7.0% total, including:

• Social insurance
• Pension contributions
• Accident insurance

Mandatory Pension Contributions

• Employer: 11.5%
• Employee: 4%

(Employers must pay into an approved pension fund.)

Additional Common Benefits

Icelandic CBAs strongly influence benefits. Competitive employers often offer:

• Private health insurance or supplemental insurance
• Transportation allowance
• Mobile/internet reimbursement
• Meal or food allowances
• Professional development support
• Home-office or remote-work allowances
• Union membership benefits

An EOR helps structure a benefit package aligned with Icelandic market standards and CBAs.

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Payroll & Tax in Iceland

Payroll Currency

• Salaries are paid in Icelandic Krona (ISK).

Payroll Cycle

• Typically monthly, paid at the end of each month.

Income Tax

Iceland has a progressive income tax system composed of:

• State tax
• Municipal tax

Employers must withhold:

• Income tax
• Employee pension contributions
• Union dues (if applicable)

Employer Payroll Responsibilities

• Register employee with Icelandic authorities
• Withhold and remit taxes
• Pay employer pension and social security contributions
• Maintain compliant payroll records
• Issue monthly payslips and annual salary summaries

An EOR manages these processes to ensure 100% compliance.

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Employment Laws & Compliance in Iceland

Key obligations include:

• Written employment contracts referencing CBAs
• Compliance with working hour laws
• Proper overtime and rest period management
• Correct calculation of leave and benefits
• Union-related obligations where applicable
• Adherence to workplace safety regulations

Termination & Notice

Notice periods depend on service length, age, and the applicable CBA.
A typical structure:

• 1 month (first year)
• 2–3 months (2–6 years)
• Up to 6 months (longer service or senior roles)

Severance is not statutory but may be provided based on CBA or company policy.

Non-Discrimination

Employers must ensure equal treatment regardless of:

Union membership

Gender

Age

Ethnicity

Disability

Nationality

Religion

Sexual orientation