Iceland Employment Law & Compliance Guide for Employers
Key employment laws in Iceland: what employers need to know
Employment in Iceland rests on a few short acts and, above all, on kjarasamningar [collective agreements], whose pay and terms bind every employer in the trade under Act No. 55/1980. Foreign employers are often surprised that there is no statutory minimum wage yet agreement rates are mandatory, and that pension contributions, a December bonus and a holiday bonus are compulsory. This page summarises the core employer rules for 2026, with official sources for each figure.
Iceland employment rules at a glance
| Topic | What the rule is | Official source |
|---|---|---|
| Minimum wage | No statutory minimum wage. Collective agreement rates bind all employers (Act No. 55/1980), e.g. ISK 473,485 a month (lowest SGS–SA grade, from 1 January 2026) and ISK 481,932 a month (VR–SA adult shop assistant start, from 1 April 2026). | SGS–SA collective agreement 2024–2028 (English) |
| Standard working hours | Set by collective agreements: 37 hours 5 minutes a week of daytime work under SGS–SA; about 35.5 active hours for VR office staff. Legal limits: average of 48 hours a week including overtime, 11 hours' daily rest and one weekly day off. | SGS – Working hours and rest periods |
| Overtime pay | Overtime is paid per hour at 1.0385% of the monthly wage (an 80% premium) under the main SA agreements. Work on major public holidays is paid at 1.375% of monthly pay per hour on top of regular pay. | VR – After-hours, overtime and major holiday work |
| Paid annual leave | Minimum 24 working days (2 days per month worked) with holiday pay of at least 10.17% of total wages (Act No. 30/1987). Leave year runs 1 May–30 April. Agreements add days with seniority, up to 30 days after 10 years. | SGS – Annual leave entitlement |
| Public holidays | 16 public holidays: 14 full days plus the afternoons of Christmas Eve and New Year's Eve. Nine are major holidays (e.g. 17 June, Christmas Day). Weekday staff keep regular pay; work on these days earns a premium. | VR – Public holidays and major public holidays |
| Sick leave | Employer-paid. Under SGS–SA: 2 days per month worked in year one, 1 month after 1 year, 2 after 2 years, 3 after 3 years, 4 months after 5 years, partly at day-rate pay. Union sickness funds pay afterwards. Statutory floor: Act No. 19/1979. | SGS – Sick leave rights |
| Maternity and parental leave | 12 months in total: 6 months per parent, 6 weeks transferable, used before the child turns 24 months. The Parental Leave Fund pays 80% of average earnings, capped at ISK 900,000 a month for leave from 1 January 2026. | Ísland.is – Parental leave amounts and calculation |
| Probation period | No statutory probation. Agreements give short notice early on: e.g. 1 week during the first 3 months (VR), or no notice in the first 2 weeks and 12 days until month 3 (SGS–SA). | VR – Term of notice |
| Notice period | Written notice ending at a month end. SGS–SA: 1 month after 3 months, 2 months after 2 years, 3 months after 3 years; 4–6 months for staff aged 55+ with 10 years' service. Statutory floor: Act No. 19/1979. | SGS – Notice period for termination |
| Severance pay | None required by law. Notice periods serve instead. Collective redundancies require consultation and an announcement to the Directorate of Labour. | Ísland.is – Collective redundancy announcement |
| Employer social contributions | About 19.5–21.5% of wages: social security tax (tryggingagjald) 6.35% in 2026, pension 11.5%, agreement funds about 1.65% (sickness 1%, training 0.3%, holiday homes 0.25%, rehabilitation 0.1%), plus 2% if the employee saves supplementary pension. | Skatturinn – Key rates and amounts 2026 |
| Employee social contributions | 4% of total wages to the pension fund (minimum total contribution 15.5% under Act No. 129/1997). Optional supplementary pension of 2–4%. Union dues (e.g. 0.7% for VR) are deducted for members. | VR – Pension fund |
| Income tax on salaries | Monthly PAYE (staðgreiðsla), state and municipal tax combined, 2026: 31.49% up to ISK 498,122, 37.99% to ISK 1,398,450, 46.29% above. Personal tax credit ISK 72,492 a month. | Skatturinn – Tax brackets 2026 |
| Mandatory bonuses and 13th-month pay | Required by collective agreements: December bonus ISK 114,000 (paid by 15 December 2026) and holiday bonus ISK 62,000 (paid 1 June 2026), pro-rated for part-time and part-year staff. No 13th-month salary. | VR – December bonus |
| Work permits for foreign nationals | Non-EEA/EFTA nationals need a temporary work permit and residence permit before starting. The employer applies to the Directorate of Immigration; the Directorate of Labour runs the labour-market check. Main types: expert knowledge, labour shortage. | Ísland.is – Apply for a work permit |
| Employment contract requirements | Written contract or written confirmation within 2 months of starting, for jobs over 1 month and 8 hours a week. Must state pay, hours, leave, notice, pension fund and the applicable collective agreement. Terms below the agreement are void. | SGS – Employment contracts |
Employer obligations in Iceland, topic by topic
Filter by primary service relevance
Does an employment contract in Iceland have to be in writing, and what must it include?
How many hours can employees work in Iceland, and when is overtime due?
Is there a minimum wage in Iceland in 2026?
How much paid leave do employees get in Iceland?
What does an employer pay on top of salary in Iceland?
How much notice must an employer give in Iceland, and is severance due?
Can I hire a non-EEA national in Iceland, and who applies for the permit?
Can I engage contractors in Iceland instead of employees?
Key employment laws in Iceland and official sources
- Act No. 55/1980 on Terms of Employment and Mandatory Pension Insurance — Makes collective agreement pay and terms the legal minimum for all employees in a trade and voids worse individual terms.
- Act No. 19/1979 on Workers’ Right to Notice and Sick Pay — Sets statutory minimum notice periods and employer-paid sick and accident pay.
- Act No. 30/1987 on Vacations — Gives at least 24 working days of annual leave and holiday pay of at least 10.17% of wages.
- Act No. 46/1980 on Working Environment, Health and Safety — Sets rest periods, the 48-hour average weekly limit, time recording and workplace safety duties.
- Act No. 129/1997 on Mandatory Pension Insurance and Pension Funds — Requires pension contributions of at least 15.5% of wages for workers aged 16 to 70.
- Act No. 90/2003 on Income Tax — Defines taxable employment income and the income tax that employers withhold through PAYE.
- Act No. 144/2020 on Maternity/Paternity and Parental Leave — Gives each parent 6 months of leave paid by the Parental Leave Fund and sets employee notice duties.
- Act No. 97/2002 on Foreign Nationals’ Right to Work — Sets work permit types, the labour-market check and employer duties when hiring non-EEA nationals.
FAQs: hiring employees in Iceland
Can a foreign company hire employees in Iceland without a local entity?
Yes. A foreign company can register with Iceland Revenue and Customs (Skatturinn) as an employer and run Icelandic payroll: withholding income tax and paying social security tax, pension and fund contributions. It must still apply the relevant collective agreement. Regular business activity in Iceland can also create a taxable presence, so many companies without an entity use an Employer of Record, which employs the person locally and handles payroll and compliance.
How much does an employee cost in Iceland on top of gross salary?
Employer on-costs are roughly 19.5–21.5% of gross pay in 2026: 6.35% social security tax, 11.5% pension, about 1.65% in collective-agreement funds, and 2% more if the employee saves supplementary pension. Also budget for the December bonus (ISK 114,000 in 2026), the holiday bonus (ISK 62,000) and holiday pay of at least 10.17%. Fund rates differ slightly between agreements.
What is the minimum wage in Iceland in 2026?
Iceland has no statutory minimum wage. Collective agreement rates are binding minimums for every employee in the trade under Act No. 55/1980. The lowest SGS–SA general-worker rate is ISK 473,485 a month from 1 January 2026, and adult VR–SA shop assistants start at ISK 481,932 a month from 1 April 2026. Most roles sit on higher grades or seniority steps.
How much notice and severance does an employer owe when dismissing an employee in Iceland?
There is no statutory severance pay. Notice must be in writing and end at a month end. Under the SGS–SA agreement it is 1 month after 3 months’ service, 2 months after 2 years and 3 months after 3 years, rising to 4–6 months for staff aged 55 or over with 10 years’ service. Shorter notice applies in the first months. Final pay includes holiday pay and pro-rated bonuses.
Can a company hire a foreign national in Iceland, and what permit is needed?
Yes. EEA and EFTA nationals can work without a permit. Others need a temporary work permit and a residence permit before starting. The employer applies to the Directorate of Immigration, and the Directorate of Labour checks whether a suitable worker is available in Iceland or the EEA. The main routes are expert knowledge and labour shortage. Working without a permit can lead to fines or imprisonment.
Is it risky to engage contractors instead of employees in Iceland?
It can be. Status depends on the substance of the relationship, not the contract label. If the person works under your direction, on fixed hours, with your tools and without business risk, courts can treat them as an employee. You could then owe collective-agreement pay, holiday pay, bonuses, sick pay, notice, pension and fund contributions, and social security tax. Use contractors only for independent, result-based work.
Related NNRoad resources for Iceland: Employer of Record in Iceland · Payroll in Iceland · Hiring foreign employees in Iceland · Contractors and on-demand talent in Iceland · Iceland employer cost calculator
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Regulation Updates in Iceland
Tax assessment results for individuals 2026
What it is: Tax assessment results for individuals 2026 have been published, and employers will receive information on outstanding balances to be withheld from wages.
What it changes: This creates a payroll withholding obligation for employers and EOR/payroll providers to operationalize the withheld amounts from employees’ wages based on the outstanding balances.
Who is affected:
- Employers
- EOR/payroll providers
What employers should do:
- Prepare to receive information on outstanding balances
- Implement payroll withholding processes to withhold the specified amounts from employees’ wages
Notes: Effective month: 2026-05.
Increase of maintenance requirement for residence permits
What it is: The policy update increases the maintenance income requirement for residence permit applicants, effective May 2026.
What it changes: The higher maintenance requirement means applicants must meet a higher standard of income/maintenance to be eligible for residence and work permits; this affects eligibility for non-EEA hires sponsored by employers and EORs.
Who is affected:
- Employers and EORs sponsoring non-EEA hires
- Applicants seeking residence and work permits who must meet the maintenance requirement
What employers should do:
- Account for the higher maintenance requirement when assessing candidate eligibility for residence and work permits
- Adjust hiring or sponsorship discussions accordingly to ensure candidate qualifications meet the new requirement
Notes: Effective month: 2026-05.
Oct 2025: Iceland Remote Work Visa Amendment: Digital Nomads & Remote Professionals
Iceland has introduced a significant update to its visa policies, allowing non-EEA nationals to apply for a Remote Work Long-Term Visa. This new regulation, effective from October 2025, aims to attract digital nomads and remote professionals seeking to experience Iceland’s scenic landscapes and innovative digital economy. The visa enables eligible individuals to stay in Iceland for up to six months while working remotely for their foreign employers, supporting Iceland’s strategic…
Update first published on NNRoad in Oct 2025. The current rules are summarised in the sections above.
Jul 2025: Iceland Expands Probation Periods in New Labor Reform
New rules effective June 2025 grant employers longer trial periods and flexible dismissal options—with updated notice requirements.
Update first published on NNRoad in Jul 2025. The current rules are summarised in the sections above.
Discover the latest employment and compliance updates in Iceland — helping you stay ahead in a changing regulatory landscape.