The default and most common form of employment in Iceland is the open-ended (indefinite) contract, which continues until terminated by either party with proper notice or by mutual agreement. A written contract is legally required once employment exceeds one month and averages more than 8 hours per week, and must be provided within two months of the start date. Terms cannot be less favourable than the applicable sector collective agreement, which typically governs minimum pay, hours, and leave even where the individual contract is silent.
Fixed-term contracts must specify an end date or the event/project marking termination. Under Act No. 139/2003 (implementing the EU Fixed-Term Work Directive), successive fixed-term contracts for the same role are restricted: repeated renewal without an objective justifying reason can result in the relationship being reclassified as indefinite. There is no single statutory maximum duration; instead, sector CBAs and the anti-abuse rule govern permissible renewals.
The legal maximum working week is 48 hours including overtime, averaged over a 4-month reference period (extendable to 6 months by CBA). Daily rest of at least 11 consecutive hours per 24-hour period and at least one full rest day per week (typically Sunday) are required. Overtime is generally paid at 1.0385x regular pay for weekday overtime and 1.375x for night/weekend work, per standard CBA rates.
Probationary periods are optional (not mandatory) and must be agreed in writing. A shortened notice period of one week applies during probation for either party. If the contract does not mention probation, none applies and standard notice periods apply from day one.
While there is no legal 13th/14th salary requirement, the vast majority of sector collective agreements mandate a 'desemberuppbot' (December/Christmas bonus) - ISK 114,000 for 2026 under the general SGS/ASI wage agreements, rising annually per the March 2024 wage settlement - and an 'orlofsuppbot' (vacation/holiday bonus) paid before the summer holiday period. Both are typically pro-rated for part-time employees or those employed less than a full year, and treated as CBA-driven customary payments rather than statutory entitlements.
Iceland does not maintain a formal statutory register or licensing regime for general job titles. The written employment contract must state the employee's job title/role description, and certain regulated professions (e.g., medicine, law, engineering, aviation) require professional licensing/registration through the relevant Icelandic authority, but this is profession-specific rather than a general job-title regulation.
Employer mandatory costs total approximately 17.85% of gross wages, comprising two distinct components that should not be conflated: (1) 'tryggingagjald' - a payroll/social security tax of 6.35% of gross wages, paid solely by the employer, funding unemployment insurance, the wage guarantee fund, rehabilitation services, and other social programs; and (2) the mandatory occupational pension contribution of 11.5% of gross wages, paid by the employer into the employee's pension fund (one of the highest employer pension contribution rates in the world). Employers may also be required to pay into CBA-specific sick pay/welfare funds (sjukrasjodur) and training funds, typically an additional ~1-2%.
Employees contribute 4% of gross wages to the mandatory occupational pension fund (matched by the employer's 11.5%). Iceland does not levy a separate employee-paid social security/payroll tax - employees instead pay progressive personal income tax (staggered at approximately 31.49%, 37.99%, and 46.29% across three brackets for 2026, withheld via PAYE/stadgreidsla) which funds healthcare and other public services. Employees may also voluntarily contribute an extra ~2-4% to a supplementary private pension, which employers must partially match (up to 2%).
In addition to statutory leave, employees are entitled to the following statutory benefits:
Iceland's social security system is funded through a combination of an employer-only payroll tax and a mandatory, separately-managed occupational pension scheme. These are legally and administratively distinct and should not be added together as a single 'social security rate' without noting the difference:
Iceland does not operate a private employer 'workers' compensation insurance' market in the U.S. sense. Instead, occupational accident and occupational disease cover is provided through Iceland's national accident insurance scheme (slysatrygging), administered by Sjukratryggingar Islands (Icelandic Health Insurance), which every employee is automatically covered by in connection with their employment. Funding flows through the tryggingagjald payroll tax and general state healthcare financing rather than a separate per-employer premium.
In practice, most sector collective agreements also require employers to purchase supplementary group life, accident, and disability insurance for employees (often called 'slysatrygging launpega' in the CBA), which pays out lump sums in the event of death or permanent disability arising from a workplace accident, on top of the statutory national accident insurance benefits. Employers should confirm the specific supplementary insurance obligations under the CBA covering their employees' occupation.
Icelandic law does not provide for statutory severance pay as a standalone entitlement separate from the notice period. Employees whose employment is terminated (with or without cause, for operational or personal reasons) are generally only entitled to their full notice-period pay (or pay in lieu of notice) plus settlement of all accrued but unused benefits - including unused annual leave (orlofslaun), any earned but unpaid December/vacation bonuses (desemberuppbot/orlofsuppbot), and outstanding wages.
Some collective agreements provide for additional redundancy-style payments (calculated as a set number of months' salary) for long-tenured employees dismissed for operational/economic reasons, but this is a CBA-specific enhancement rather than a general statutory right, so employers should check the applicable agreement before assuming no severance is owed.
There is no statutory 13th or 14th month salary requirement in Iceland. However, under nearly all sector collective agreements, employers must pay a 'desemberuppbot' (December/Christmas bonus) - set at ISK 114,000 per full-time employee for December 1, 2026 under the general wage agreement schedule (rising from ISK 110,000 in 2025 to ISK 118,000 in 2027) - and an 'orlofsuppbot' (vacation bonus) disbursed ahead of the summer holiday period.
Both bonuses are fixed krona amounts (not tied to salary level) set periodically through national wage settlements, and are pro-rated for employees who worked only part of the year or on a part-time basis. Because these payments derive from CBAs rather than statute, the exact amount and eligibility rules should be confirmed against the specific collective agreement covering the employee's role.
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Your employee's hours, time off, holidays, bonuses, and commissions are automatically calculated into payroll. RemoFirst will invoice you in either US Dollars (USD), Euros (EUR), British Pounds (GBP), Canadian Dollars (CAD), Australian Dollars (AUD), or Singapore Dollars (SGD) around the 15th of each month to make sure your employees are paid on time. To make it even easier, you can summarize your entire global team's salaries to aggregate them into one payment (instead of many individual payments).
Unlike full-time employees, contractors work on projects with multiple companies at a given time and are technically self-employed. Full-time employees are solely focused on their employer and usually receive benefits (such as health insurance, equity or stock options, and time off) as an additional form of compensation. While it can be cheaper to work with international contractors instead of paying benefits to a full-time employee, you run the risk of misclassification. It's recommended to work with an EOR for contractor onboarding and payments, so you can know that your international contractors are paid compliantly and on time.
Whenever the employee or employer has a question about, or anything else related to international employment, they can speak with our customer support team to get answers from our team of experts.
