Iceland Country Guide 2022

Iceland

Iceland is known for its fantastic work-life balance which is reflected in high productivity levels at work and outstanding employee performance. The country’s workforce is said to be young, dynamic, well-educated and multilingual.

Iceland is the world’s most peaceful nation and along with its Scandinavian neighbours, boasts impressive performance on equality, democracy, per capita wealth, and environmental sustainability.

  • Capital: Reykjavík
  • Spoken Languages: Icelandic
  • Currency: Icelandic krona (kr, ISK)
  • Population size: 364,134 (est. 2020)
  • Languages spoken: Icelandic
  • Time zone: UTC +0
  • Ease of doing business: Very easy
  • Payroll frequency: Monthly
  • VAT – standard rate: 24%
  • GDP – real growth rate: 0.1%

Employing in Iceland

Most employee entitlements are defined by collective bargaining based on the 1938 Act on Trade Unions and Industrial Disputes. With 91.8% of the workforce organized into unions, Iceland has the highest union membership rate. Overall, employees in Iceland enjoy protection against discrimination based on age, religion, sexual orientation, gender expression, and race.

Payroll

Employees in Iceland get paid on either a weekly or monthly basis. In some sectors, bi-weekly payments are common.

Minimum Wage

There’s no minimum wage mandated under Icelandic law; employers and employees can enter into collective bargaining to determine wage rates as they see fit.

Bonuses

Employees who have worked for the same employer for more than twelve weeks during the current year are entitled to an annual bonus which is usually paid in December.

Employment Contract Details

Employment agreements can be in English or Icelandic and include relevant information such as the job position, working conditions, working hours, holidays, and conditions for terminations. All employment contracts are according to the trade union.

Probation Period

The minimum probation period is 3 months and the maximum probation period is 6 months.

Onboarding Time

The minimum onboarding time we need is only 20 working days.

Working Hours and Overtime

A standard working week in Iceland is 40 hours divided into five eight-hour days with the following regulations on breaks and rest periods:

  • at least 15 minutes of break after six consecutive hours of work – but most companies have lunch breaks ranging from half an hour up to one hour plus additional coffee breaks of up to 35 minutes;
  • at least eleven consecutive hours of rest each day;
  • at least one day off per week.

Employees can work overtime if it’s agreed between the parties. Daily, employees cannot work more than 10 hours.

Overtime payment is mandatory and cannot be included in the salary. Hours outside of standard work hours are considered overtime. Employees can work a maximum of 162.5 hours of overtime a month.

Paid Time Off

Employees accumulate paid time off, depending on their tenure in the same line of work.

The minimum PTO entitlement is 24 weekdays annually, compensated at a rate of 10.17% of your normal wages. After five years of employment with an employer, you’re entitled to 27 weekdays, paid at an 11.59% rate. This increases to 30 weekdays, compensated at a 13.04% rate after 10 years of employment with the same employer.

Public Holidays

Employees can take the 16 public holidays off and are entitled to 1.375% of the normal monthly wages per hour if they’re expected to work on a public holiday.

Iceland celebrates 12 national holidays a year. National public holidays include:

  • New Year’s Day
  • Good Friday
  • Easter
  • The first day of summer
  • Labor Day
  • Pentecost
  • Fishermen’s Day
  • Icelanders’ national holiday
  • President’s Birthday
  • Icelandic language day
  • Sovereignty Day
  • Christmas Day

Taxes in Iceland

Employer

  • 11.50% – Mandatory Pension Fund
  • 2.00% – Supplementary (optional) Pension Fund (the employee can elect to supplement their pension by either 2% or 4%, and the employer then is obliged to match this with 2% in either case)
  • 6.10% – Social security contribution (this contribution is calculation on the Gross salary + Mandatory Pension Fund + Supplementary Pension fund amounts)
  • 1.55% – Union fee
  • 0.10% – Rehabilitation Fund
  • 10.17% – Vacation Allowance – once annually (this value is a minimum 10.17% of annual gross salary and can go up to 13.04% of annual gross salary, depending on the employees tenure with the employer)

Employee

  • 4% – Pension fund contribution

Personal Income Tax Rates

The individual income tax ranges from 31.45% to 46.25%. Income tax is calculated according to progressive rates. Multiple additional factors may impact overall rates such as the household status and the number of children.

  • 31.45% on the first ISK 4,188,216 per year ($34147.70)
  • 37.95% on the next ISK 7,569,948 per year ($61719.92)
  • 46.25% on any income over ISK 11,758,159 per year ($95867.58)

Types of Leave

Sick leave

Employees are entitled to 2 days of sick leave per month, accruing 24 days per year. The first 2 days per month are paid at 100% by the employer. After the first 2 days, the amount of pay and length of leave will depend on the Trade Union Selected by the employee.

Maternity leave

Pregnant employees are entitled to six months of maternity leave, starting up to a month before delivery is due, and compensated at a rate of 80% of the employee’s normal wages.

Parental leave

Fathers are entitled to six months of paternity leave, paid at a rate equivalent to 80% of the normal wages. One month of parental leave is transferable between partners and both parents’ leave entitlements can be exercised until the newborn turns 18 months of age.

In addition, parents can take up to 13 consecutive weeks of leave to care for children up to the age of eight.

Other leave

Hospitalization leave: parents are entitled to 12 days of leave if any of their children are hospitalized.

Adoption leave: Adoptive parents can exercise the same parental leave entitlements as natural birth parents, with each partner taking up to six months of paid leave off work.

Employment Termination

Termination process

Either the employee or the employer has the right to terminate the employment contract. However, the employer or employee must give notice in writing, and the resignation period commences at the start of the following month. The termination period usually lasts three months unless both parties agree to a different date. Employers are not required to provide any specific reason for terminating an employee.

Notice period

The minimum notice period is 7 days and will be increased according to the length of the employment.

  • 1 week for the first 3 months of the probation period
  • 1 month following the end of probation period
  • 3 months after 6 months of employment

Severance

There is no legally mandated severance pay, but unions can negotiate a mutual rate applicable to their members.


How We Can Help

It can be challenging to figure out how to employ a team, incorporate a subsidiary, and set up payroll in Iceland; it requires great attention to detail and a deep understanding of local best practices. Access Financial makes it painless and easy for you to expand into Iceland – we do the research, and you reap the benefits.

Access Financial simplifies global expansion by enabling you to hire talent in Iceland without a branch office or subsidiary. You find the talent, and we put your team member on our locally compliant payroll. For all intents and purposes, the employee works for you, however, they’re legally on our payroll.

If you would like to discuss how Access Financial can help in Iceland, please contact us.

Disclaimer

WE HAVE PREPARED THIS AS A GUIDE ONLY; IT DOES NOT FORM PART OF AN OFFER. PLEASE REQUEST ILLUSTRATIONS BASED ON YOUR SPECIFIC CASE FROM ONE OF OUR SOLUTION MANAGERS.