Iceland, a Nordic country in Europe, is ranked among the world’s top greenest economies by the Global Green Economy Index. The country rolled out free-market reforms in the 1990s that has helped it achieve strong and sustained economic growth over the years. The diversified economy is driven by exports, manufacturing, service industries, biotechnology, software production, and financial services. Major exports include marine products, ferro-silicon alloys, aluminum, woolen goods, and financial services. Iceland’s competitive economy is facilitated by the commitment to open-market policies that promote dynamic trade and investment flow. Efficient and transparent regulations in Iceland encourage entrepreneurial initiatives. The country’s economy is expected to grow from 26.00 USD Billion in 2019 to 32.00 USD Billion in 2020.

Currency: Iceland Krona (ISK)

Principal Language: Icelandic

Government: Parliamentary Representative Democratic Republic

Capital City: Reykjavik

Major Cities: Kopavogur, Hafnarfjordur, Akureyri, Garðabaer

Employment Contracts

Employment contracts in Iceland can be written or verbal, though it is a general practice to provide written contracts. The contracts must specify details including compensation, termination requirements, and benefits. The salary/compensation must be stated in Icelandic krona.

Work/Time Regulations

Under the Act on Working Environment, Health and Safety in Workplaces, No. 46/1980, the work schedule including overtime cannot exceed an average of 48 hours in a week over a 4-month period. Employees are entitled to a minimum 11-hour rest period each day and 1 day off in a week. The collective agreements regulate the duration of breaks if they are paid. Lunch breaks are not considered as a part of working hours and are unpaid while coffee breaks are paid. During overtime, meal and coffee breaks are considered as a part of working hours and paid according to the overtime rate.

Collective agreements include overtime rate that may exist between collective agreements. Generally, overtime is paid at a rate (hourly) equivalent to 1.0385% of the monthly salary for regular work. Work done on a major holiday is paid at the rate (hourly) equivalent to 1.375% of the monthly salary for regular work.


Two categories of holidays are observed across Iceland – major holidays and general holidays, and both are mandatory paid holidays.
Major holidays are:

  • Jan. 1: New Year's Day
  • Good Friday
  • Easter Sunday
  • Whitsun
  • June 17: Iceland independence Day
  • Dec. 24: Christmas Eve
  • Dec. 31: New Year's Eve

General holidays are:

  • Maundy Thursday
  • Second day of Easter
  • First day of summer
  • Ascension day
  • May 1: International Labor Day
  • Second day of Whitsun
  • First Monday of August: Shop and Office Workers' Holiday
  • Dec. 26: Second day of Christmas

Annual Leave
The Holiday Allowance Act No. 30/1987 provides at least 2 days of annual leave for each month of service during the last holiday allowance year, i.e., May 1 to April 30. The maximum annual leave, therefore, is 24 days in a year. Employees are entitled to at least 10.17% of their gross wages as holiday allowance.

Sick Leave
The Act Respecting Laborers’ Right to Advance Notice of Termination of Employment and Wages on Account of Absence through Illness and Accidents, No. 19/1979 specifies the rights of employees who are unable to execute their regular duties because of an injury or sickness.

Employees who have worked for at least 1 month with the same employer are entitled to receive sick pay. After 1 month, employees receive 2 days’ sick leave every month. The duration of sick leave increases after completing 2, 3, and 5 years of employment with the same employer.

Maternity Leave
Parents who have been working in Iceland for 6 months or longer receive a paid leave for childbirth, adoption, or permanent foster care of a child aged less than 8 years under the Act on Maternity/Paternity Leave and Parental Leave, No. 95/2000. Self-employed parents who are not active on the labor market or are pursuing full-time educational programs are also entitled to same maternity leave and benefits. The maternity pay is equal to 80% of an employee’s average wages or is calculated according to the 12-month period of continuous employment ending 6 months before the childbirth. Part-time employees receive at least lkr 100,720 each month during maternity leave while full-time employees receive lkr 139,591 each month.

Paternity Leave
Parents with a child aged less than 8 years are entitled to 13 weeks of unpaid and independent parental leave to care for the child. Parental leave can be taken after 6 months of continuous employment with the same employer.

Family Leave
Parents who have worked for 1 month in the last 12 months are entitled to a family leave of 7 days every year to care for a sick child aged less than 13 years. After completing a year of employment with the same employer, parents can take 10 days of family leave in a year. Parents are entitled to their full wages including shift premiums (if applicable).


Pension and Social Security
Employers are required to withhold pension contributions from employees’ wages. According to the law, employees should contribute 4% of their wages toward the pension.

Old-age Pension
Employees who are aged 67 or more and have lived in Iceland for at least 3 years between the age of 16 and 67 are entitled to a pension. Those who lived in Iceland for 40 years between the age of 16 and 67 qualify for a full pension. If the duration of residence is less than 40 years, the pension gets reduced proportionally. Though the pension amount is specified by the law, a pensioner’s income also influences the pension amount. Since January 2017, individuals can choose to start receiving the pension from the age of 65, 67, or later, each with its own special conditions.

Household Supplement
A household supplement can be provided to single disability or old age pensioners.

Early Retirement Pension
Employees are entitled to early retirement pension if their degree of disability is assessed to be 75% as a result of an illness or injury and have lived in Iceland for at least 3 years before applying.

Rehabilitation Pension
Employees are provided rehabilitation pension if their degree of permanent disability after an injury or illness remains unclear. Other conditions include:

  • Must be aged between 16 and 67
  • Must be receiving treatment at or outside a health care institution
  • Must be registered in census
  • Must be receiving a sickness or accident allowance

Invalidity Allowance
Employees aged between 16 and 67 who have lost 50% to 74% of their working capacity are entitled to an Invalidity allowance.

Child Pension
Children aged less than 18 years are entitled to the child pension if one of their parents is deceased or receives a disability, old-age or rehabilitation pension. Adopted and Stepchildren are also entitled to child pension if their maintenance obligated parent is not alive. Single parents can also apply for child pension if the paternity of the child is unclear, for example, if a child is conceived with artificial insemination. If a parent is entitled to a disability allowance, a supplement is paid equivalent to 75% of the child pension.

Health Insurance
European Economic Area (EEA) citizens who move to Iceland start receiving health insurance coverage by Sjúkratryggingar Íslands, SÍ (Iceland’s Health Insurance) from the date they register with Þjóðskrá (Registers Iceland). Those who move to Iceland from non-EEA countries start receiving health insurance coverage automatically by SÍ 6 months after getting registered with Þjóðskrá.

Social Security Accident Insurance
Employees who get injured at work, during sports training with a recognized sports body, or while performing rescue work, are compensated if specific conditions are met. The compensation includes accident per diem payments, disability /death benefits, and hospital expenses.

Workers' Compensation
Employers are required to pay wages for up to 3 months in the case of an injury/illness if all health insurance and social security payments are paid to the employer. If the medical costs are not refunded by the social security or health insurance, employers must refund all medical expenses.

How GPS can Help

With our Global PEO/Employer of Record services, companies can expand into Iceland and hire their employees without having to establish a branch office or subsidiary in Iceland.

  • Your candidate is hired via our Iceland PEO. If needed, we can also help you find the right talent in any country with our comprehensive global staffing services.
  • Your new employee begins work quickly as we take care of employment contracts, statutory and non-statutory benefits, and running their payroll - all in full compliance with Iceland laws.
  • Global PEO Services experts manage all day-to-day operational issues such as employee expenses, and severance/termination if required.
  • With no contractor risks, pass on the compliance burden to Global PEO Services.

Spin Off/M&A Support

  • Ensure continuity of payroll, benefits and HR support when acquiring or spinning off a business with employees overseas.

24/7 Support in 150+ Countries

  • Empower your teams with 24/7 support and a single point-of-contact model in which experienced client services directors are in continuous communication with information and advice.
  • We are backed by a mix of 300+ multidisciplinary experts from HR, Payroll, Finance, Tax, and Legal domains who are ready to respond to the expected and unexpected needs of your business on the shortest notice.

Easy Visibility into Your Employee Time & Attendance and Benefits Data
With our Global PEO, you get access to Mihi, our proprietary SaaS solution for time and attendance, vacation, leave management and benefits enrollment and management. Mihi enables clients to have easy access to employee data in real time. It is designed specifically for companies with a global workforce, especially when working in multiple countries with low headcount.

Ready for Growth When You Are
When ready, we can seamlessly transition you from the PEO/EOR model to your own legal entity and provide ongoing international HR, finance, legal, compliance and staffing support. Learn more about our end-to-end international expansion services.

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