Employer of Record in Iceland

Businesses can only operate smoothly in Iceland if they comply with local labor laws including drafting compliant employment contract agreements and meeting taxation and payroll obligations. Learn more about the employment laws and regulations in Iceland below, to avoid any compliance issues.

Employment Contract Requirements

Icelandic labour law categorises contracts as either fixed-term or permanent, with no requirement for contracts to be in Icelandic. However, for employment lasting more than one month with a commitment of more than 8 hours weekly, a written employment contract is mandatory. This contract must include the following basic terms of employment:

• Identification of both parties
• Starting date (and duration for temporary contracts)
• Workplace and working hours
• Job description, duties, and responsibilities
• Basic salary (including compensation, benefits, or payment details)
• Number of holidays
• Notice periods for termination
• Pension funds
• Reference to collective agreements

Onboarding Process

We can help you get a new employee started in Iceland quickly, with a minimum onboarding time of just 1-2 working days. The timeline starts once the employee submits all required information onto the Playroll platform and completes any necessary local authority registrations. For non-nationals, the Right to Work assessment (if applicable) may add up to three extra days. Additional time may be needed for follow-ups on this assessment. Please note, payroll cut-off dates can impact the actual start date. Playroll's payroll cut-off date is the 10th of each month unless otherwise specified.

Working Hours in Iceland

The standard workweek in Iceland consists of 40 hours, distributed across five 8-hour days.

Overtime in Iceland

According to Icelandic Labour Law, any work exceeding the standard 8-hour workday qualifies for overtime compensation. The official hourly overtime pay rate is 1.0385% of the regular pay rate. Specific regulations exist for shift workers, and the total working hours, including overtime, should not surpass 48 hours per week.

Probation Period in Iceland

Typically, probation periods in Iceland extend for about 3 months.

Fiscal Year in Iceland

1 January - 31 December is the 12-month accounting period that businesses in Iceland use for financial and tax reporting purposes.

Payroll Cycle in Iceland

The payroll cycle in Iceland is usually monthly, with employees being paid by the 1st of the following month.

Minimum Wage in Iceland

In Icelandic law, there is no national minimum wage; instead, it is established by the Trade Union to which the employee belongs. These Trade Unions set the minimum wage, taking into account factors such as the employee's age and job type.

Bonus Payments in Iceland

Icelandic law does not mandate a 13th or 14th-month salary. Nevertheless, collective agreements specify that employees are entitled to a Christmas bonus in December and a holiday bonus given between 1 May and 15 August.

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 22.07% on top of the employee salary in Iceland.

Employee Payroll Tax Contributions

In Iceland , the typical estimation for employee payroll contributions cost is around 4%.

Individual Income Tax Contributions

Income tax in Iceland follows a progressive rate structure, with various factors, including household status and the number of children, potentially influencing the overall tax rates.

Pension in Iceland

Individuals aged 16 to 70, both employees and employers, are required to contribute to a pension fund in Iceland. The minimum contribution rate stands at 15.5%, with employers contributing 11.5% and employees contributing 4%. The employee's contribution is deducted from their taxable income.

Mandatory Leave Entitlement in Iceland

The annual leave entitlement in Iceland is 24 days for a full time worker. These can include public holidays on top of that or within those days, which would otherwise be unpaid.

Public Holidays In Iceland

Employees are entitled to paid holidays during festival holidays, which encompass both public and religious celebrations. This includes memorial holidays and religious holidays of Christian origin. The following are the 15 public holidays in Iceland:

Paid Time Off in Iceland

Both full-time and part-time employees receive 24 days of paid time off (PTO) annually. PTO accrues at a rate of 2 days per month.

Maternity Leave In Iceland

In Iceland, employees with 6+ months of service are entitled to 12 months of paid maternity and paternity leave:

• Each parent is entitled to 5 months of leave.
• An additional 2 months can be shared between parents, allowing either: one parent to take up to 7 months and the other 5 months; or alternatively both parents to take 6 months each.
• Social Security covers 80% of salary, up to 600,000 ISK per month.
• Leave can be extended by 3 unpaid months.
• One month of leave can be transferred between parents.

Paternity Leave In Iceland

Paternity leave and maternity leave is the same in Iceland.

Sick Leave In Iceland

Employees in Iceland are entitled to 24 days of paid sick leave per year. The initial 2 days per month are fully paid by the employer, and thereafter, the payment amount is determined by the employee's Trade Union.

Parental Leave In Iceland

Employees have the right to take a single period of unpaid leave from work for a continuous duration of up to 13 weeks to care for a child up to the age of 8.

Termination Process in Iceland

In Iceland, employers are not permitted to terminate employment at will outside the probation period and must have a just cause for termination. Compliant terminations include:

• Voluntary employee resignation
• Mutual agreement
• Unilateral employer decision (based on probation, objective reasons, disciplinary dismissal, or unsuitability for the job)
• Contract expiration

Notice Period in Iceland

The minimum notice period for Icelandic employees is set at 7 days and will be increased according to the length of employment:

• First 3 months of probation period: 1 week notice
• Following the end of probation period: 1 month notice
• More than 6 months of service: 3 months notice

Severance in Iceland

Icelandic labour law lacks specific provisions regarding severance payments. Nevertheless, employers are obligated to settle accrued benefits such as unused paid time off, Christmas bonuses, vacation bonuses, etc. upon termination.