Employment Law in Iceland

Contracts

In Iceland, employment contracts can be fixed-term (tímabundinn) or open-ended, governed by the Act on Terms of Employment. Open-ended contracts must include benefits such as pension contributions, paid annual leave, and health insurance. Fixed-term employees receive equal benefits after one month. 

Iceland’s apprenticeship system (Vocational Training Act) mandates employers in trades (e.g., fishing, construction) to: 

• Provide accredited vocational training
• Pay at least the minimum wage
• Limit apprenticeships to three years
• Ensure supervision by certified professionals

Termination and notice periods

In Iceland, employers and employees are equally allowed to cancel employment contracts without stating the reason. However, employers must still adhere to labor laws concerning unfair termination, for example, termination under discriminatory practices. Labor laws require employers to provide written notice of termination or pay in lieu of notice, with a minimum of one month for employees who have completed at least one year of continuous employment, increasing with tenure.

Employees are not entitled to statutory severance pay; however, additional compensation may be provided based on employment contracts or collective agreements. There is no statutory gratuity payment in Iceland; however, additional compensation may be provided based on employment contracts or collective agreements. As your employer of record (EOR) in Iceland, we can assist you in managing employee terminations by providing legal guidance and a personalized process to ensure compliance with national labor standards and minimize legal risks.

Probation periods

In Iceland, probation periods are explicitly addressed in local law, generally set at three months for standard positions, with similar durations applicable across sectors, as specified in employment contracts.

Working hours and overtime

In Iceland, the standard workweek is typically Monday through Friday, with eight hours per day, totaling 40 hours per week. Employees are prohibited from working for more than eight hours a day without appropriate compensation. 

Any work beyond eight hours a day is considered overtime, and employees are entitled to overtime pay. For the first 162.5 overtime hours worked in a month, employees are entitled to 0.875% of their monthly salary as their per-hour rate. For any overtime hours exceeding this, employees are entitled to 1.0385% of their monthly salary as their per-hour rate. Work on weekends and holidays often has higher rates, as agreed to in collective bargaining agreements.

Taxes

In Iceland, withholding tax is known as Income Tax and is deducted by employers before paying salaries to employees. Employers must deduct income tax from employee salaries based on applicable income tax brackets and submit it to the Directorate of Internal Revenue.

Employer payroll contributions

Iceland’s social security system requires employer contributions that are dependent on the total number of employees, and these contributions cover pensions, medical care, disability insurance, and gratuity payments. In addition, workers’ compensation is financed by contributions from state governments, employers, and employees.