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Last updated at June 17, 2022
Beautiful scenery of Iceland


Icelandic Króna (ISK)



Time Zone


Key Country Facts


Iceland is a representative democracy and parliamentary republic. It ranks high in economic, democratic, and social stability, as well as equality, ranking third in the world by median wealth per adult. In 2021, it was ranked as the fourth happiest country in the world, the most peaceful and the best performer in terms of gender equality. Iceland runs almost completely on renewable energy.


Iceland is 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 km2 (39,315 sq mi), but the entire country is 103,000 km2 (40,000 sq mi). 62.7% of the country is tundra. The capital city is Reykjavik with approximately 217 000 inhabitants in the greater city area. The total population of Iceland is approximately 343 000.


The climate of Iceland is subpolar, but the island is affected by the North Atlantic current which means its climate is 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 to be 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 with 97% of society identifying themselves as middle class. The arts are highly valued in Iceland with galleries and theatres being found well off of the beaten track 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 part of the population are members of the Church of Iceland, but atheism and even some new religions, such as “heathenry” are becoming more prominent.

Official Language

Icelandic is the official language in Iceland. In the past, Gaelic was the native language of early Icelanders and this has been a strong influence on the language today. Icelanders learn English from a very early age and the majority are fluent.

Iceland HR at a Glance

Employment Law

Icelandic employment law is largely regulated through legislation, as well as by collective agreements. As Iceland is part of the EEA-Agreement with the EU, it implements most EU regulations and directives regarding Labour Law into Icelandic law. The key sources of legislation and rules governing employment 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)
  • Labour 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)

Employment Contract

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, it 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 to which the employee is entitled.
  • 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 working day or week.
  • Reference to the applicable pension fund.
  • Reference to the applicable collective agreement and trade union.

Contract Terms

Icelandic contracts of employment fall under the regulation of the Labour Code which is overseen by the Ministry of Social Affairs. Employment contracts may not specify poorer terms than are provided for by law or in collective bargaining agreements even with the agreement of the employee.

A written employment contract is required for all employment engagements. 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 may contain a probationary period up to a maximum of 3 months

Working Hours

A normal office workweek in Iceland is Monday through Friday, 37,5 hours per week excluding a half hour lunch break. It is illegal for employers to schedule a workday that is longer than 13 hours.

Employees also have the right to a rest period of 11 hours of continuous rest per 24 hours. 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, where it does not cause any disruption to the business, are very common.


All work after 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 which 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, regardless of whether the task takes 4 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 of which would be 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 sickness absence. Unless otherwise agreed upon, employees are expected to continue to work during the notice period.

Notice of termination must be in writing and 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 turn of the next month.

An employment which has been terminated by either party remains intact until the end of the notice period, which means that rights and obligations under the agreement remain unchanged during the period. The parties can however come to an agreement to end their relationship before the notice period expires

Severance Pay

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 collective agreement 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 generally based on one to 24 months of salary, taking seniority, age, social factors, and other factors into account. 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, or the parties may reach an agreement after notice is given.

Notice Period

A notice period of 3 months is common in Iceland. The minimum notice period allowed is 1 month and 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 and 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 12-24 months for senior management employees according to case law.

The employees´ salaries when employed must reflect the restrictions imposed post-employment. In some cases employees receive payments during the restrictions but in other cases the employees’ salaries and benefits while employed justify restriction periods where no remuneration is paid during such periods. This is usually dealt with in the employment agreement.

Notice Period

By Employer

Notice of termination must be given prior to dismissal in the event of a termination without cause and at the employer’s initiative. In the event of termination of the employment agreement for an indefinite term the prior notice period is at least 30 days, with three days added per year of work, limited to 90 days in total. The employer may opt to provide a pay in lieu of notice and release the employee from working in this period. Dismissal without notice is accepted in terminations for cause, in which case the communication of the termination is immediate and no payment in lieu is due.

By Employee

In the case of a termination of employment agreement of an indefinite term, without cause and upon the employee’s initiative (resignation), the employee must provide a prior notice to the employer of 30 days or request to be released from working during the prior notice period.

In the event of termination by mutual consent, the prior notice period will be reduced by half.

Severance Pay

Under the five distinct types of termination severance pay as follows:

1. Termination without cause by the employer: payment of salary balance, accrued vacation plus one-third bonus, proportional vacation plus one-third bonus, proportional 13th salary, 50 per cent severance fund (FGTS) fine over the balance of the employee’s individual account. The employee is also entitled to withdraw the FGTS balance and receive the unemployment insurance.

2. Resignation by the employee: payment of salary balance, proportional 13th salary, accrued vacation plus one-third bonus and proportional vacation plus one-third bonus;

3. Indirect termination: same payments due as in a termination without cause;

4.Termination by mutual consent: half the payment of the prior notice and the FGTS fine (employee’s part) and, in full, other labour allowances due in a termination without cause. In this type of termination, the employee will be able to withdraw up to 80 per cent of the FGTS balance and will not be entitled to receive the unemployment insurance.

5.Termination for cause: payment of salary balance and accrued vacation plus one-third.

Fixed term Contracts

Most employees are employed on indefinite contracts in Iceland, but fixed term contracts are permissible.

The Icelandic Act No. 139/2003, on Fixed Term Employment sets out a framework to prevent abuse arising from the use 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 2 years. Fixed term contracts for managerial positions are allowed for a period of 4 years.

A new employment contract is deemed to replace a previous one if it is extended or if a new fixed-term contract is established between the same parties within three weeks from the completion of the previous agreement.

Employees with fixed term contracts must not be treated less favourably in terms of compensation and benefits than their counterparts with indefinite contracts.

Tax and Social Security

Personal Income Tax

Most employees are employed on indefinite contracts in Iceland, but fixed term contracts are permissible.

The Icelandic Act No. 139/2003, on Fixed Term Employment sets out a framework to prevent abuse arising from the use 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 2 years. Fixed term contracts for managerial positions are allowed for a period of 4 years.

A new employment contract is deemed to replace a previous one if it is extended or if a new fixed-term contract is established 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.

  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

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 – Minimum contribution is ~11%)

*The above rates serve as a broad guideline. Actual rates charged will differ.


Salary Payment

Salaries are paid on the 1st day of the following month I.e. November salary is paid 1 December. 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 net salary.

Annual Leave

In Iceland, vacation is earned in one year to be taken in the next. The vacation year runs from 1 May to 30 April. Employees who have not worked a full year are entitled to proportional vacation and if this is the case, the employee is deemed to have earned 2 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, but it is important to note that many collective bargaining agreements provide for 25 – 30 days of vacation per year.

Additionally, increased vacation and vacation pay is 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 1st, and holiday bonuses are payable in summer, between May 1st and August 15th. If an employee has worked only part of the year, their bonus will be proportional to time in service. The bonus is paid together with the salary in the corresponding month.

Sick Leave

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 illness. After 21 days of consecutive illness, sick pay is made 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. Whether or not an employee is entitled to such leave and whether the leave is granted with or without pay will often be stated in an agreement (e.g. collective agreement), the employment contract or the company’s internal rules. In practice, in the absence of 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

Carers’ leave

Children – If a child is sick, the collective bargaining agreements and contracts 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, but The Equal Status Act specifies that employers must do what they can to make it possible for employers to fulfil their responsibilities towards their families. Most collective bargaining agreements specify a number of leave days allowed for family care.

Parental Leave

Maternity Leave and Paternity Leave does not exist separately in Iceland. Instead, it is Parental leave in which is 12 months in duration, allowing for both parents to take 6 months away from work each, with 1 month transferable between the parents. Mothers may take up to 1 month off of work before the baby arrives and must take at least 2 weeks of parental leave following the birth of her child.

The standard monthly parental leave payment is 80% of salary but 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.

Public Holidays

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 Country Name

Statutory Benefits

Most benefits available to employees will be specified in individual collective bargaining agreements, but 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 collective agreements.
  • Employees receive two holiday bonuses per year, one paid between 1 May and 15 August 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 and 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 pension fund must be active in Iceland.

Employees may make a higher contribution to their pension fund than 4%, to a maximum 11% (including 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 and the contribution is taken from the gross salary, thus reducing the employee taxation.

Other Benefits

Additional benefits are typically mandated by the individual contract of employment or by collective bargaining agreements. 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

General Information

Nationals of the member states of the European Economic Area (EEA), European Free Trade Association (EFTA) and the Faroe Islands do not need 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 Labour (Vinnumálastofnun) provided that the conditions for the issuing of a residence permit for the relevant foreign national are met.

A foreign national from a country outside the EEA and/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 do not need a special residence permit to stay in Iceland for a period exceeding three months (or up to six months if he is seeking employment), but 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, but at least three months should be allowed.

Cost – The current fee for residence permits for the purpose of work is ISK 15,000.

It is incumbent on the employer to verify that an employee holds a valid work and residence permit and keep a copy of the relevant documents for 12 months after the termination of the employment. An employer employing 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, not only for tax purposes, but also 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/residence permit is lodged.

Public Holidays in 2022

S.No Occasion Date
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

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