Hire in Iceland
Here’s where you get started with human resources best practices and hiring in Iceland.
Icelandic Króna (ISK)
Key Country Facts
Iceland is a representative democracy and parliamentary republic. It ranks high in economic, democratic, social stability and economic equality. The country ranks third in the world by median wealth per adult. In 2021, Iceland was ranked as the fourth happiest country in the world, the most peaceful and the best performer in terms of gender equality. The country is powered almost completely by renewable energy.
Iceland is located at the juncture of the North Atlantic and Arctic Oceans. The main island is entirely south of the Arctic Circle.
Iceland is the world’s 18th largest island, with the main island covering 101,826 square kilometers (39,315 square miles. The entire country spans 103,000 square kilometers (40,000 square miles), 62.7% of the country classified as tundra. The capital city is Reykjavik, home to approximately 217,000 inhabitants within the greater city area. The total population of Iceland is approximately 343,000 people.
The climate of Iceland is subpolar but the island is affected by the North Atlantic current, making the climate more temperate than would be expected for its location. July is the hottest month with an average temperature of 9 degrees Celsius and March is the coldest with an average temperature of -1 degree Celsius.
Iceland is considered one of the safest countries to live in with very low levels of crime. The police are unarmed and Iceland does not have a standing military force. Egalitarianism is prevalent throughout society, affirmed by 97% of society identifying themselves as middle class. The arts are highly valued in Iceland, with galleries and theatres found well off of the beaten path and even in small fishing villages. Iceland’s literary history dates back to the 12th century.
Christianity has been Iceland’s official religion since the 10th century. A large segment of the population belongs to the Church of Iceland. However, atheism and even some new religions, such as heathenry, are becoming more prominent.
Icelandic is the official language in Iceland. Gaelic was the native language of early Icelanders, bringing strong influence to the language today. Icelanders learn English from a very early age and the majority of Icelanders are fluent.
Iceland HR at a Glance
Icelandic employment law is largely regulated through legislation, as well as by collective bargaining agreements (CBAs). As Iceland is part of the EEA-Agreement with the EU, it implements most EU regulations and directives regarding Labor Law into Icelandic law.
The key sources of legislation and rules governing employment in Iceland are:
- Working Environment, Health and Safety in Workplaces (Act 46/1980)
- Act on Equal Status and Equal Rights of Women and Men, (Act 10/2008)
- Labor Market Measures (Act 55/2006)
- Prohibition on Termination of Employment due to Family Responsibilities (Act 27/2000)
- The Act on the Mandatory Guarantee of Pension Rights and the Operation of Pension Funds. (Act 129/1997)
- The Holiday Allowance (Act 30/1987)
- The Pension (Act 129/1997)
- The Wage Guarantee Fund (Act 88/2003)
Icelandic employment contracts must be in writing and contain the following points at a minimum:
- The identities of the parties, including identification numbers
- The place of work (where there is no fixed or main place of work, the workplace is the registered place of business or, where appropriate, the residence of the employer)
- The title, grade, nature or category of the work for which the employee is employed (or a brief specification or description of the work)
- The date that employment will commence
- The expected duration of the contract
- The amount of paid leave the employee is entitled to
- The length of the periods of notice to be observed by the employer and the employee in the event of termination
- The initial basic amount of monthly salary and how often it is paid
- The length of the employee’s normal work day or work week
- Reference to the applicable pension fund
- Reference to the applicable CBA and trade union.
Icelandic contracts of employment fall under the regulation of the Labor Code, which is overseen by the Ministry of Social Affairs. Employment contracts may not specify inferior terms than are provided for by law or in CBAs, even with the agreement of the employee.
A written employment contract is mandatory for any employment engagement. Furnishing this is the responsibility of the employer and it should be presented to the employee no later than two months after they commence work.
An employment contract can be entered into for a fixed or indefinite period. If it is a fixed period, the end date must be clearly stated in the contract.
Probation Period/ Trial Period
An employment contract can contain a probationary period up to a maximum of three months.
A normal office work week in Iceland is Monday through Friday at 37.5 hours per week, excluding a half hour lunch break. It is illegal for employers to schedule a workday longer than 13 hours.
Employees also have the right to a rest period of 11 hours of continuous rest per 24 hour period. Depending on the nature of work and the employment contract, Sundays should always be a day of rest.
As with other Scandinavian countries, flexible working arrangements – when they do not cause any disruption to the business – are very common.
All work beyond eight hours per day is considered overtime unless the employment contract states explicitly that the salary is deemed to compensate for occasional overtime. If a contract stipulates overtime, an employee can ask an employer to specify how many hours are included before overtime pay starts.
Overtime is calculated as 0.875% of monthly salary per hour for the first 162.5 hours of overtime per month.
Any overtime work greater than 162.5 hours is paid at 1.0385% of monthly salary per hour of overtime worked. It is possible for employees to request overtime as extra holiday days instead of pay. In this case, one hour of overtime translates to one hour and forty minutes of a holiday. If an employee is called into work on a Saturday or Sunday, they are entitled to four hours overtime pay just for showing up. This rule stands regardless of whether the task takes four hours or not.
Either the employee or the employer has the right to terminate the employment contract. However, notice must be given in writing and the notice period commences at the start of the following month. The notice period usually lasts three months, unless both parties agree to a different date. The minimum period is one month. The employer does not need to state a reason for the termination of an employee but the reason for the termination must not contravene any protections for employees, such as a dismissal on the grounds of pregnancy, trade union representation, family responsibilities or absence due to illness. Employees are expected to continue to work during the notice period, unless otherwise agreed upon.
A notice of termination must be concluded in writing and is based on the turn of the month. If the employee does not receive formal notice of dismissal at least on the last working day of the month, the notice period is automatically pushed back to the start of the next month.
An employment which has been terminated by either party remains intact until the end of the notice period. This means the rights and obligations under the agreement remain unchanged during the period. However, the parties can reach an agreement to end the relationship before the notice period ends.
There is no statutory right to severance pay in Iceland. The employee is, however, still entitled to their ordinary salary payment and additional contractual benefits during the period of notice in accordance with the terms of employment.
In addition, employers who are not bound by any CBA may choose to offer some kind of severance package including severance pay, education, release from work duties, etc. Any severance payment, according to this type of agreement, is typically based on one to 24 months of salary. This also takes into account seniority, age, social factors and other factors. The right to such benefits is normally conditional upon the employee entering into a termination agreement, whereby the employee waives the right to take legal proceedings pursuant to the Employment Act. Termination agreements may be entered into before the employee receives notice. Alternatively, the parties may reach an agreement after notice is given.
A notice period of three months is common in Iceland. The minimum notice period allowed is one month. There is no upper limit.
Post-Termination Restraints/ Restrictive Covenants
Non-Compete and Non-Solicit (Customer and Employee) Clauses
According to Icelandic law, post-termination restraint clauses in employment agreements are generally binding and enforceable between the employer and the employee. These are common in the Icelandic market. Such provisions may give rise to damages payable from the employee to the previous employer. They may also be enforceable by other measures such as injunctions.
Non-compete provisions must be within reasonable limits and may not unduly restrict the employee’s freedom of employment. The clause contains a balancing exercise whereby the interests of the employer are weighed against the employee’s right to freedom of employment. Non-compete clauses are generally not binding for more than 12 to 24 months for senior management employees, according to case law.
The employees´ salaries, when they are employed, must reflect the restrictions imposed post-employment. In some cases, employees receive payments during the restrictions. However, in other cases, the employees’ salaries and benefits (while employed) justify restriction periods where no remuneration is paid during such periods. This is usually addressed in the employment agreement.
All time spent in the service of the employer must be registered as working hours. The employer must have a routine system in place for recording working hours. Employees must be informed of this routine. The recording of working hours must be clear and easy to understand. As a rule, the start and end times of the day or shift must be recorded
Trade Unions / Collective Agreements
Much of the employer-employee relationship is governed by CBAs and there are three main union federations in Iceland.
The Federation of General and Special workers in Iceland (SGS) is a federation of trade unions in the private sector and part of the public sector. SGS is the largest association of workers in Iceland, encompassing 19 trade unions of general and special workers. It has approximately 53,000 members. The five main branches of SGS are food and agriculture, building and construction, service and tourism, industry and public services.
Samiðn is a nationwide federation of labor unions whose members work in engine mechanics, hairdressing, metal mechanics, technical drafting, building industries, horticulture and shipbuilding.
VM is the Icelandic Union of Marine Engineers and Metal Technicians.
Fixed term Contracts
Most employees are employed on indefinite contracts in Iceland. However, fixed-term contracts are permissible.
The Icelandic Act No. 139/2003, on Fixed-Term Employment puts forward a framework to prevent abuse arising from the application of successive fixed-term employment contracts or relationships.
The use of successive fixed-term contracts is to be limited. The Act prohibits the use of successive fixed-term contracts to a maximum of three years. Fixed-term contracts for managerial positions are allowed for a period of four years.
A new employment contract is considered as replacing a previous one if it is extended or if a new fixed-term contract is settled between the same parties within three weeks from the completion of the previous agreement.
Employees with fixed-term contracts must not be treated less favorably in terms of compensation and benefits than their counterparts with indefinite contracts.
Tax and Social Security
Personal Income Tax
The Icelandic tax system for individuals is progressive and based on state as well as municipal tax. The income tax is withheld at source and the municipal tax varies between 12.44% and 14.45%. However, a final assessment is made based on the decisions of each municipality.
|Monthly Income (ISK)||State Tax (%)||Municipal Tax (%)||Total Tax (%)|
|Step 1||On the first 349 018||17.00||14.45||31.45|
|Step 2||349 019 to 979 846||23.50||14.45||37.95|
|Step 3||Over 979 847||31.80||14.45||46.25|
Social Security contribution paid by Employee: 4.0%
Social Security contribution paid by Employer: 6.35%
(Note: Employers are also obliged to contribute to an employee mandatory occupational pension scheme. The minimum contribution is approximately 11%)
*The above rates serve as a broad guideline. Actual rates charged by GoGlobal will differ.
Salaries are paid on the first day of the following month (e.g. the November salary is paid on December 1). Deductions can only be made if they are statutory or agreed upon in writing, in advance.
The payslip should show line items for all elements of gross salary and all deductions leading to THE net salary.
In Iceland, vacation is earned in one year to be taken in the next. The vacation year runs from May 1 through April 30. Employees who have not worked a full year are entitled to proportional vacation. iF this is the case, the employee is deemed to have earned two vacation days for each month worked during the earning year.
The minimum annual leave entitlement for employees, according to the Holiday Allowance Act, is 24 days. However, it is important to note many CBAs provide for 25 – 30 days of vacation per year.
Additionally, increased vacation time and vacation pay are granted to reward length of service:
While working in Iceland, employees accumulate paid holiday. The minimum holiday entitlement is 24 weekdays of paid leave. Holiday pay is 10.17% of total wages. After five years in the same line of work, it increases to 25 weekdays and it is paid at 10.64% of total wages. After five years with the same employer, it increases to 27 weekdays and is 11.59% of total wages. After ten years with the same employer, it is 30 weekdays and 13.04% of total wages.
Fixed Christmas bonuses are payable on December 1. Holiday bonuses are payable in the summer between May 1 and August 15th. If an employee has worked only part of the year, their bonus will be proportional to their service time. The bonus is paid together with the salary in the corresponding month.
During their first year with a new employer, employees are entitled to two days of paid sick leave per month. After one year, employees are entitled to be paid for two months away from work due to illness. Employers have a right to demand a sick note from a doctor to verify an illness. After 21 days of consecutive illness, sick pay is offered through social security.
After five years, employees are entitled to be paid for four months of sick leave and six months after ten years. If an employee changes employers after five years, they are still entitled to at least two months of sick leave with the new employer.
Compassionate & Bereavement Leave
There is no legislation in Iceland for paid bereavement leave. The employment contract, CBA or the company’s internal rules will determine whether or not an employee is entitled to such leave and whether the leave is granted with or without pay. In practice, in the absence of a specific agreement, most companies allow at least two days paid bereavement leave in the event of the death of a close family member
Other Rights for Leave of Absence
Children: If a child is sick, the CBA and contract will specify how many days of paid leave an employee may take each year. The standard is 24 days.
Family: Iceland has very family-friendly legislation and so the definition of “family” is broad and not necessarily restricted to blood relatives. There are no legal entitlements to time off to care for family. However, The Equal Status Act specifies employers must do what they can to make it possible for employers to fulfill their responsibilities towards their families. Most CBAs specify a number of leave days allowed for family care.
Maternity Leave and Paternity Leave do not exist separately in Iceland. Instead, it is Parental leave, which is 12 months in duration. It allows both parents to take six months away from work each, with one month transferable between the parents. Mothers may take up to one month off of work before the baby arrives and must take at least two weeks of parental leave following the birth of her child.
The standard monthly parental leave payment is 80% of salary. This is capped at ISK 600,000 before taxes.
During periods of parental leave, the employment contract and all benefits remain intact.
In addition to the leave allowed immediately after childbirth, parents are entitled to take unpaid leave equivalent to four months in total in order to care for a child until he or she is 8 years old.
There are 16 public holidays in Iceland, some of which fall on the weekend and some of which comprise a half-day only.
Benefits to the Employee in Iceland
Most benefits available to employees will be specified in individual CBAS. However, there are a few benefits which exist across Iceland and its employment sectors:
- Employers pay the employee union membership fee (typically 0.7 – 1% of salary) as well as the various union welfare dues (including sick, holiday, education, and rehabilitation funds) to provide employees with extra benefits under the CBA.
- Employees receive two holiday bonuses per year, one paid between May 1 and August 15 and the second one paid on 1 December. In the case of the summer holiday bonus, this is 10.17% of annual income and it is paid on a pro rata basis if an employee has not completed 12 months of service at the time of payment. To be eligible to receive the December holiday bonus, an employee must have at least 12 months of service with the current employer. The December bonus is a fixed rate of approximately ISK 82,000.
The minimum employee contribution to a pension fund is 4% of the total wages. The employer must pay a minimum contribution of 11%. Pension savings institutions may be decided by a collective wage agreement or by the employee opting for a specific provider. The employee’s pension fund must be active in Iceland.
Employees can make a higher contribution to their pension fund than 4% up to a maximum 11%, which includes the compulsory 4% contribution. If employees choose this option, the employer must contribute 2% extra to pension savings. Many employees do contribute more than mandatory, as there are options to use this extra payment to pay down housing loans faster. The contribution is taken from the gross salary, thus reducing the employee’s tax liability.
Additional benefits are typically mandated by the individual contract of employment or by CBAs. The generosity of benefits provided to an employee usually depends on their level of seniority. Common benefits for persons at a more senior level, are:
- additional paid holidays
- additional contributions to a private pension insurance
- private health insurance and life assurance policy
- contributions from the employer during parental leave (in addition to state benefit)
Visas and Foreign Workers
Nationals of the member states of the European Economic Area (EEA), European Free Trade Association (EFTA) and the Faroe Islands do not require a work permit in Iceland. Nationals from other countries outside the EEA, EFTA and the Faroe Islands require a work permit to work. Applications for work permits, including the necessary supporting documentation, must be submitted to the Directorate of Immigration (‘Útlendingastofnun’) which forwards the application to the Directorate of Labor (‘Vinnumálastofnun’). The conditions for the issuing of a residence permit for the relevant foreign national must be met.
A foreign national from a country outside the EEA or EFTA who plans to stay in Iceland for more than three months must have a valid residence permit. Foreign nationals from the EEA and EFTA states are not required to hold a special residence permit to stay in Iceland for a period exceeding three months (or up to six months if he or she is seeking employment). However, the individual must register with Registers Iceland and fulfil certain conditions under Article 89 of Act No. 80/2016 on Foreigners. Citizens of the other Nordic countries (Denmark, Finland, Sweden and Norway) are allowed to stay in Iceland without a residence permit.
Work permits are valid for either one or two years, depending on the category of the employee
Timeframe: The processing time can vary depending on the category of worker and method of application. Applicants should allow for at least three months.
Cost: The current fee for residence permits for the purpose of work is ISK 15,000.
It is incumbent on the employer to verify an employee holds a valid work and residence permit. Employers must keep a copy of the relevant documents for 12 months after the termination of the employment. An employer engaging individuals who do not hold the required work or residence permits can be liable for sanctions, such as a fine.
Getting a Tax Number
All residents must have an Icelandic Identification Number. This number is not just for tax purposes, as it is also required to open a bank account or even take membership at a local gym. The Icelandic Identification Number is known locally as ‘Kennitala’ and will be issued automatically by the Directorate of Immigration as soon as an application for a work or residence permit is lodged.
Public Holidays in 2022
|1.||New Year’s Day||January 1st|
|2.||Maundy Thursday||April 14th|
|3.||Good Friday||April 15th|
|4.||Easter Monday||April 18th|
|5.||May Day||May 1st|
|6.||General Prayer Day||May 13th|
|7.||Ascension Day||May 26th|
|8.||Whit Monday||June 6th|
|9.||Independence Day||June 17th|
|10.||Commerce Day||August 1st|
|11.||Christmas Eve||December 24th|
|12.||Christmas Day||December 25th|
|13.||Boxing Day||December 26th|
|14.||New Year’s Eve||December 31st|