Iceland PEO & Employer of Record

WeHG provides an International PEO and global Employer of Record service in Iceland to companies willing to enter the Iceland market or hire local/expat employees in this country.

Traditional approach requires establishing a subsidiary in Iceland.  However our solution allows you to start the operations in Iceland within days hence save time and money.  WeHG would hire candidates on your behalf while you maintain full operational control of their work. So legally they would be our employees, on our local payroll, 100% compliant but will work on your behalf. 

Iceland fast facts

Population, million: 0.36

Land area, sq. km: 102,775 km2

Capital: Reykjavík

Local currency: Icelandic króna (ISK)

Hiring, Negotiating and Doing Business in Iceland

Necessity of written employment contract

In Iceland, employment contracts can be oral or written, but it is best practice to put a strong, written contract in place, in Icelandic, which spells out the terms of the employee’s compensation, benefits, and termination requirements. An offer letter and employment contract in Iceland should always state the salary and any compensation amounts in Icelandic krona rather than a foreign currency.

Iceland Employment Contract

Types of employment agreements

The majority of workers on the Icelandic labour market are employed on a full time basis under an open ended employment contract. Other employment arrangements, such as part-time work and fixed-term work are permissible and exist in various sectors of the labour market.

Iceland working hours

A normal office workweek in Iceland is Monday through Friday, 8 hours per day. That is 37.5 hours per week, including lunch (usually a half-hour to one hour), equaling a 40-hour workweek. Additionally, you are entitled to a 15-minute “coffee” break. Most offices start working between 8 and 10 AM. It is illegal for employers to schedule a workday that is longer than 13 hours.

You also have the right to a minimum rest period of 11 hours of continuous rest per 24 hours. For example, if you are traveling for work and arrive home late in the evening, your workday will start 11 hours later, even after your usual scheduled start. Depending on your contract, Sundays should always be free, and usually Saturdays too.

Overtime

Here is where your contract really matters. All work after eight hours per day is considered overtime unless your contract includes overtime explicitly. If your contract stipulates overtime, you can ask your employer to specify how many hours are included before overtime pay starts.

Overtime is calculated as 0.875% of your monthly salary per hour for the first 162.5 hours of overtime per month.

If you work more, the rate changes to 1.0385% of your monthly salary per hour of overtime worked. Overtime is during night shifts (between midnight and 7 AM) the first 162.5 hours are calculated at the rate of 0.9375% of your monthly salary.

Vacation leave in Iceland

While working in Iceland, you accumulate paid holiday. The minimum holiday you are entitled to per year is 24 weekdays of paid leave. Holiday pay is 10.17% of total wages. After five years in the same line of work, it increases to 25 weekdays. It is paid at 10.64% of total wages. After five years with the same employer, it increases to 27 weekdays and is 11.59% of total wages. After ten years with the same employer, it is 30 weekdays and 13.04% of total wages.

Sick leave: 

For your first year with a new employer, you are entitled to two sick days of sick leave per month. After one year, you are entitled to two months away from work due to illness. Your employer has the right to demand a note from your doctor to verify your illness. To obtain one, contact your local health care clinic (heilsugæsla). 

After five years, you are entitled to four months of sick leave and six months after ten years. If you change employers after five years, you are still entitled to at least two months of sick leave with your new employer. 

During the first six months at a new job, you are also entitled to two days each month you have worked with your employer for children’s sick leave if your child is under the age of 13. After the first six months, children’s sick leave rights become 12 days per year. 

You have rights to occupational injury insurance from Icelandic Health Insurance in the case of a work-related accident. 

Iceland Maternity Leave

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.

Iceland Severance Laws

Either the employee or the employer has the right to terminate the employment contract. However, notice must be given in writing, and the resignation period commences at the start of the next month. The termination period usually lasts three months, unless both parties agree to a different date. The employer does not need to state a reason for the termination of an employee, but you may request a meeting to discuss your termination. Unless otherwise agreed upon, you are expected to continue your work during your resignation period.

Notice periods 

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. A worker deprived of his right to a lawful notice of termination can claim damages, equal to his loss during the notice period. 

Where the worker on the other hand leaves without giving the required notice, the employer may have, in certain circumstances, a right to claim damages. There are exceptions, where no notice is required – such as in the event of gross misconduct by either party or dangerous or insufficient working conditions.

Iceland Tax

Personal income is a net income tax base with a progressive state income tax rate and municipal tax.

* Icelandic króna

** The municipal income tax withheld at source is 14.44% but varies from 12.44% to 14.52% in the final assessment, based on the decision of each municipality.

Icelandic-source income in the form of remuneration to non-resident directors and committee members, grants, or remuneration for independent personal services and art performances is taxed by assessment at a rate of 20% plus the average municipal income tax rate, which is 14.44% in 2019.

Pension fund contributions

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.

Additional Benefits in Iceland

Some employers provide supplementary private insurance policies that provide for coverage of some treatments not covered by the basic insurance.

Iceland Holidays

• New Year’s Day
• Maundy Thursday
• Good Friday
• Easter Monday
• First Day of Summer
• Labour Day
• Ascension Day
• Whit Monday
• Icelandic Republic Day
• Bank Holiday
• Christmas Eve
• Christmas Day
• Second Day of Christmas
• New Year’s Eve

Why Choose WeHireGlobally

WeHG takes care of all the onboarding hurdles, payroll, compensation and benefits, tax filing, and termination of employment. Our Employer of Record solution allows you to manage your overseas teams efficiently while minimizing cost and risk.