Iceland is known for its fantastic work-life balance which is reflected in high productivity levels at work and outstanding employee performance. The country’s workforce is said to be young, dynamic, well-educated and multilingual.
In fact, most people in Iceland do not only have a very good command of English but do also have advanced knowledge of at least one other European language. A remote employee in Iceland will thus be a great asset to your global team, both in terms of communication and skill set.
When hiring an employee in Iceland for a period exceeding one month who is supposed to conduct more than eight hours of work per week, it is mandatory to either put a written employment contract in place or to provide the employee with a written statement outlining the basic terms of employment including:
- Identification of both parties
- Date of commencement (and employment duration for temporary contracts)
- Job description, duties and responsibilities
- Basic salary as well as other compensation or benefits and payment details
- Working hours
- Total number of holidays
- Notice periods for employment termination
- Information on pension funds
- Reference to applicable collective agreements
Icelandic labour law distinguishes between fixed-term employment contracts and permanent employment contracts. There are no legal clauses requesting contracts to be Icelandic.
Probation periods usually last three months.
Working Hours and Breaks
A standard working week in Iceland is 40 hours divided into five eight-hour days with the following regulations on breaks and rest periods:
- at least 15 minutes of break after six consecutive hours of work – but most companies have lunch breaks ranging from half an hour up to one hour plus additional coffee breaks of up to 35 minutes
- at least eleven consecutive hours of rest each day
- at least one day off per week
According to Icelandic labour law, any work performed in addition to an employee’s standard eight-hour working day – or on top of the standard 40-hour week – counts as overtime and needs to be remunerated accordingly. The official hourly overtime pay rate is 1.0385% of an employee’s monthly wages. Special regulations apply for shift workers. Weekly working time should not exceed 48 hours, overtime included.
Employees in Iceland get paid on either a weekly or monthly basis. In some sectors, bi-weekly payments are common.
Iceland does not have a national minimum wage that applies to all sectors. Instead, minimum remuneration is negotiated for each industry separately under collective agreements.
Sick leave in Iceland is subject to collective agreements which results in employees from different industries enjoying different sick leave entitlements. However, all employees must receive at least two days of fully paid sick leave for each month of work during their first year.
Starting with the second year of service, sick leave entitlements increase as follows:
- after one year: one month of fully paid sick leave
- after three years: one month of fully paid sick leave + one month of sick leave paid at day rates
- after five years: one month of fully paid sick leave + two months of sick leave paid at day rates
Employees who have worked for the same employer for more than twelve weeks during the current year are entitled to an annual bonus which is usually paid in December.
Taxes and Social Security Contribution
Employees and employers in Iceland are subject to the following tax and social security contribution rates (as of 2021):
20% corporate tax rate
24% VAT (standard rate)
Monthly income and municipal tax rates:
up to ISK 349.018: 31.45%; up to ISK 979.847: 37.95%; over ISK 979.847: 46.25%
17.6% of employee’s salary including:
6.1% national insurance contribution
11.5% mandatory pension fund
4% to 8% of employee’s salary to pension fund (mandatory 4% to public pension fund, an additional 4% to a private pension fund is optional)
Employees are entitled to at least 24 days of paid leave per year which can be taken between 2 May and 15 September of each year. A special holiday bonus which should be at least 10.17% of the employee’s total wages is to be paid out between 1 May and 15 August.
In addition, Iceland observes 15 public holidays – including Easter and Whit Sunday. Employees who are required to work on these days must be paid at an hourly rate equaling 1.375% of their usual monthly salary.
Maternity Leave and Paternity Leave
Mothers and fathers in Iceland respectively have the right to three months of maternity / paternity leave following a child’s birth. Plus an additional three months which can be split between both parents.
During this time, parents receive maternity / paternity benefits from the Icelandic Government amounting to 80% of their normal wages. The same applies to adoptive parents.
In addition, parents are entitled to four months of unpaid parental leave which can be taken at any time until the child turns eight.
Additional Leave and Benefits
Furthermore, parents are permitted to request up to ten additional days off each year to look after their sick children – limited to children under the age of 13. In case of serious illness or injury of a child or spouse, up to three months of leave can be granted.
In addition to employment termination by default – i.e. in case of a fixed-term contract – resignation and mutual agreement, the employment agreement may be terminated due to the following reasons (non-exhaustive list):
- redundancy or other economic reasons
- summary dismissal due to gross misconduct
- breach of employment contract by either party
- employee’s underperformance
- employee’s long-term illness
Statutory notice periods in Iceland are set as follows:
|Length of service
|> 1 year
|> 3 years
|> 5 years
In practice, however, notice periods vary between one week and six months – depending on the individual employment contract or applying collective agreements – with three months being quite common. No notice must be given in case of dismissal for gross misconduct or when resigning because of intolerable working conditions. There are no legal provisions for severance pay in Iceland.
Hiring in Iceland?
Not sure if you should start with a contractor or go ahead and hire a full-time teammate in Iceland? The Lano platform makes it easy to go from freelance to full-time employee. Get expert guidance from the Lano team to compare your options and keep growing.