Definitive Guide to Hiring in Iceland

Hiring in Iceland

Hiring employees compliantly in Iceland means doing it yourself or using an Employer of Record like Global Expansion. You should be careful using independent contractor agreements in Iceland so that you don’t run afoul of employment laws. To hire an employee compliantly and offer them mandatory benefits and compliant agreements, you can:

(a) Establish your own new legal entity, banking, accounting and payroll service in Iceland; or

(b) use an Employer of Record like Global Expansion who can handle all of the details for you.

Labor Laws in Iceland

Employment laws in Iceland are uniquely suited to the country’s way of life, and crucial to understand if you want to employ local talent in this country. Get the details on Iceland employment laws and Iceland policies here.

Employee Probation Period

• The probation or trial period is of 3 months

Annual Leave in Iceland

• The Act provides for a minimum of two working days' holiday for each month in employment during the past holiday allowance year (May 1st to April 30th), two weeks or more constituting one month in this respect, shorter periods not being counted. 
• The minimum holiday for each year is therefore 24 working days. 
• Sundays and other public holidays do not count as holidays in this respect, nor the first five Saturdays during holidays. 
• Holiday is to be granted during the period 2 May to 15 September each year (summer holiday period), but the social partners may make provisions in collective agreements for holiday to be taken at other times of the year when particular operational circumstances render this necessary. 
• Nevertheless, workers shall at all times be given the right to take at least 14 days’ holiday during the summer holiday period.

Holidays in Iceland

Workers are entitled to paid holidays during Festival (public and religious) holidays. These include memorial holidays and religious holidays (Christian origin).

Here is the full list of public holidays in Iceland:

Maternity Leave Iceland

• Both parents have an equal, non-transferable, right to take three months’ leave in connection with 
  
  • the birth, 
  • first-time adoption, or
  • fostering of a child irrespective of whether they work in the private or the public sector, or are self-employed.
• They are also able to divide a further three months’ leave between themselves as they wish. 
• A parent obtains the right to payments from the Maternity/Paternity Leave Fund after it has been active on the domestic labor market for six consecutive months prior to the first day of the maternity/paternity leave. 
• A parent’s working time in other EEA countries is taken into account if the parent has been employed in Iceland for at least one month during the last six months prior to the first day of the maternity/paternity leave. 
• These payments amount to 80% of average gross wages or calculated remuneration being based on a continuous twelve-month period ending six months prior to the birth of child.

Paternity Leave Iceland

• Both parents have an equal, non-transferable, right to take three months’ leave in connection with 
  
  • the birth, 
  • first-time adoption, or
  • fostering of a child irrespective of whether they work in the private or the public sector, or are self-employed.
• They are also able to divide a further three months’ leave between themselves as they wish. 
• A parent obtains the right to payments from the Maternity/Paternity Leave Fund after it has been active on the domestic labor market for six consecutive months prior to the first day of the maternity/paternity leave. 
• A parent’s working time in other EEA countries is taken into account if the parent has been employed in Iceland for at least one month during the last six months prior to the first day of the maternity/paternity leave. 
• These payments amount to 80% of average gross wages or calculated remuneration being based on a continuous twelve-month period ending six months prior to the birth of child.

Sick Leave in Iceland

• A worker, who is unable to perform his normal duties at work due to sickness or accidents occurring in the worker’s free time is entitled to wages from his employer for a certain period of time.
• The minimum rights during the first year of service with an employer are 2 days in respect of each month.
•  After one year of employment a worker is entitled to total wages for 1 month out of every 12 months
• After three years with the same employer, 1 month of total wages and 1 month with day wages out of every 12 months
• Finally, after five years with the same employer, 1 month of total wages and 2 months with day wages out of every 12 months.

Working Hours in Iceland

• Hours of daytime work are according to collective agreements defined as 40 hours per week, divided into five eight hours working days from Monday to Friday, and wages determined as weekly or monthly wages. 
• Paid coffee brakes, usually 35 minutes, are included in the 8-hour work day. 
• Day time hours usually start at 07:00 (general workers, industrial workers) but the time they end differs based on what collective agreement applies. 
• For general workers it ends at 17:00 hours but for industrial workers it is usually at 18:00 hours.

Overtime in Iceland

• Overtime pay is paid for work in excess of 8 hours per day and 40 hours per week. 
• Work performed outside day time hours is remunerated with overtime pay. 
• It is not permitted to pay day-time wages for work performed during hours outside daytime hours even though the worker in question has not done his full 8 hours in day-time. 
• Overtime is paid at an hourly rate equaling 1.0385% of the monthly wages for regular day work.
• Work on major holidays is paid with an hourly pay equaling 1.375% of the monthly wages for regular day work, in addition to the 8 hours’ day-time wages.

Termination of Employment in Iceland

• The principal rule in Iceland is that employers and employees are equally authorized to cancel employment contracts without stating the reason for this. 
• Employees are generally hired without time limits, in which instance the employment contract is cancelled with a termination notice period as stated in the collective agreements. 
• The employment termination notice is mutual and such employment cancellations shall be in writing and in the same language as the employee’s employment contract. 
• The employee has the right to an interview regarding the end of his employment and the reasons for the termination of his employment and can request them to be stated in writing. 
• A request for the interview shall be given within 96 hours from the employees’ knowledge of the contract´s termination. 
• Should the employer fail to fulfil the said request the employee is entitled to another interview with the employer in the presence of his or her union representative or other representative of the union, should he or she request so.
• Notice periods range from 12 days to six months (three months are common), depending on rules of the applicable collective agreement

Notice Period in Iceland

• Notice periods range from 12 days to six months (three months are common), depending on rules of the applicable collective agreement.
• 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.

• The notice periods are as follows: -
  
  • After one-year continuous employment with the same employer = one month's notice.
  • Continuous employment for three years with the same employer =- two months' notice.
  • Five years of continuous engagement with the same employer = three months' notice

Iceland Salary and Wages

13th / 14th Month Pay in Iceland

• Yes (Mandatory)
• There is no statutory requirement to pay the 13th or 14th month salary.
• However a collective agreement has ensured that employees receive a Christmas bonus in December and a holiday bonus payable between May 1st and August 15th.

• Social security contributions apply to wages and salaries and must be withheld by the employer. 
• These contributions cover health insurance, unemployment insurance, birth leave insurance and bankruptcy insurance. 
• Social security contributions are imposed at a flat rate of 6.6%. 
• Self-employed individuals must register for social security purposes, and are subject to the same social security contribution rate.
• Every employee from 16 to 70 years of age and every employer must contribute to a pension fund. 
• The minimum contribution is 15.5% (4% for employees and 11.5% for employers) of all employees’ and self-employed persons’ remunerations. 
• The employee’s contribution (4%) is deducted from their taxable income.

Immigration Iceland

• Nationals from other Nordic countries may stay and work in Iceland without restrictions. 
• However, if they take up residence or work in Iceland, they must register with the National Registration Office.
• Nationals of EEA/EFTA countries may stay and work in Iceland without a permit up to three months after their arrival in the country, or stay up to six months if they are seeking employment. 
• If the individual resides longer in Iceland, he or she must register his or her right to residency with the National Registration Office. 
• Non-EEA nationals who want to extend their stay and work in Iceland must obtain work permits and residence permits. 
• The application must generally be made before entering Iceland.

• The following are four categories of work and residence permits based on employment: 
  
  • Permit for a job that requires expert knowledge 
  • Permit based on temporary shortage of laborers 
  • Permit for athletes 
  • Permit for a qualified professional based on collaboration or service contracts regarding educational, academic or scientific work
• A temporary work permit is issued to the employer to allow the employment of a foreign national. 
• A temporary work permit may be revoked if the activities of the permit holder become inconsistent with the conditions for the permit.
• The following are the general conditions for the granting of a temporary work and residence permits: 
• Qualified persons cannot be found in Iceland or in EEA/EFTA countries or the Faroe Islands, occupational sectors in the country lack workers or athletes, or other special reasons exist for granting such permits. 
• The local trade union in the relevant branch of industry, or the appropriate national union, has provided its comment on the application. 
• A signed employment contract covers a specific period or task and guarantees the employee wages and other terms of service equal to those enjoyed by local residents.
• The employer takes out health insurance for the foreign employee, which provides the same coverage as the coverage provided under the Social Security Act. 
• The employer guarantees the payment of the cost of sending the employee back to his or her home if the employee becomes incapable of working for a long period as a result of illness or accident or if the employment is terminated because of reasons for which the employee is not responsible. 
• A satisfactory health certificate for the employee is submitted.
• A temporary work permit for a job that requires expert knowledge is granted for an initial period of up to two years. 
• It may be renewed for up to two years at a time. 
• A temporary work permit based on a temporary shortage of laborers is granted for an initial period of up to one year. 
• It may be renewed for up to one year at a time. 
• A temporary work permit for athletes is granted for an initial period of up to one year. 
• It may be renewed for up to two years at a time. 
• A temporary work permit for qualified professionals based on collaboration or service contracts on educational, academic or scientific work is generally granted for a period of up to six months per contract.
• Permanent work permits are no longer granted in Iceland. 
• Instead, foreign individuals who have acquired a permanent residence permit have the right to work in Iceland without limitations. 
• Therefore, if a foreign individual loses his or her permanent residence permit, he or she also loses his or her right to work in Iceland without limitations.

Value Added Tax (VAT) in Iceland

• Value Added Tax (VAT) is an indirect consumption tax levied on all stages of domestic business transactions, as well as on the imports of goods and services. 
• The standard rate of VAT in Iceland is 24%. 
• The reduced rate of VAT in Iceland is 11% and applies to the sales certain goods and services such as rental of hotel- and guestrooms, campground facilities, catering and sale of food, alcohol etc.

Payments And Invoicing

• Icelandic tax residents must file annual income tax returns for the 2018 calendar year by 31 March 2019. 
• Employers withhold taxes for salaried individuals. 
• Employers that do not pay the withholding tax have a surety liability for the payment.
• Nonresident taxpayers earning Icelandic-source salaries and pensions must file tax returns. 
• Self-employed individuals must make estimated monthly payments of tax on deemed salaries.
• Other individuals in cohabitation that have applied for joint taxation are taxed separately on all types of income. 
• However, married persons are jointly liable for their tax payments and jointly net their credits and debts. Tax liability arising during the marriage continues after the divorce.

Payroll Accrual in Iceland

Country Accruals Additional Information

Description

Every employee from 16 to 70 years of age and every employer must contribute to a pension fund. The minimum contribution is 15.5%
(4% for employees and 11.5% for employers) of all employees’ and self-employed persons’ remunerations. The employee’s
contribution (4%) is deducted from their taxable income.
In addition to the minimum contribution, an employee can contribute and deduct up to an additional 4% from one's taxable income, as
long as the contribution is used to increase one's pension rights. This additional contribution can be paid into a private pension fund.
Should the employer’s contribution to the pension fund exceed 12.5% of the employee’s remuneration, and also exceed ISK 2 million
per year, the excess shall be calculated as taxable income.
By supplying a completed A1 (former E-101) certificate, individuals from European Economic Area (EEA) member countries are not
bound to contribute to an Icelandic pension fund. An employer of an individual supplying an A1 certificate is subject to a lower rate of
social security contribution. Those exemptions are dependent on equivalent payments being made in the individual’s country of
residence.

Payroll Accruals Additional Information

Accrued Benefits in Iceland

Why use Global Expansion to hire in Iceland

Establishing a branch office or subsidiary in Iceland can be time-consuming, expensive and complex. With such a robust labor market in place, one must pay great attention to detail when structuring employment because Iceland labor laws are complex.

The company also has a responsibility to comply with specific employment practices dictated by Iceland law to maintain its good standing as an equal opportunity employer.

Global Expansion makes it easy for you to expand into Iceland. We'll help you hire your candidate of choice, handle HR matters and payroll, and ensure that you comply with local laws without the burden of setting up a foreign branch office or subsidiary. In addition, you'll have complete control and direction over your employees.

We enable you to stay in control of everything. Our Iceland Global Professional Employer Organization (PEO) and Employer of Record (EOR) solution provides you with peace of mind to focus on running your company and the security to enter new markets.