The Icelandic labour market is built on collective agreements. They set minimum pay and many working conditions, and they bind every employer and employee in their sector, union members or not. Here is what employers need to know about leave, pay, tax and ending employment.
Statutory minimums come from the Annual Leave Act, the act on sick leave and notice, and the Maternity/Paternity and Parental Leave Act. Collective agreements usually improve on them, for example with extra leave for long service.
Working days a year, earned at 2 days per month worked, with holiday pay of at least 10.17% of wages. The leave year runs from 1 May to 30 April.
Accrued in the first year of employment, paid by the employer. Entitlements increase with service under the law and collective agreements.
6 months for each parent, of which 6 weeks can be transferred. Paid by the Parental Leave Fund at 80% of average earnings, up to a monthly cap.
Iceland does not separate maternity and paternity leave. Each parent has an equal, individual right to paid parental leave, which must be taken within 24 months of the birth. To receive earnings-related payments, a parent must have been active on the labour market for the 6 months before the birth. Mothers may start leave up to 1 month before the expected birth date.
Set up each Icelandic leave type in IceHrm with its own accrual, carry forward and approval rules, including monthly accrual and seniority-based entitlements from your collective agreement. Employees see their live balance before they apply, and managers see who is away on a shared calendar. Leave management →
Iceland has no statutory minimum wage. Minimum pay rates are negotiated in collective agreements between unions and employer organisations, and wages below the agreed rates for a job are void.
Set per sector and job by collective agreements, which apply to all employees in the sector.
Many collective agreements have since shortened the working week further, often to 36 hours.
Including overtime, averaged over a reference period, with at least 11 hours’ daily rest.
Overtime rates are set by collective agreements, typically as a percentage of monthly salary per hour. Most agreements also require a December bonus and a holiday (orlofsuppbót) bonus in fixed amounts that are revised each year.
Capture attendance and overtime in IceHrm and feed the hours straight into payroll, so agreement overtime rates reflect what was actually worked. Time & attendance →
Employment income is taxed at source each month. The rates combine state income tax and an average municipal tax. Employers deduct tax after the employee’s 4% pension contribution, then apply the personal tax credit the employee has told them to use.
| Monthly income | Rate |
|---|---|
| ISK 0 – 498,122 | 31.49% |
| ISK 498,123 – 1,398,450 | 37.99% |
| Over ISK 1,398,450 | 46.29% |
Unused personal tax credit can be transferred between spouses. Employers report and pay withheld tax and social security tax to Skatturinn (Iceland Revenue and Customs) every month.
On top of gross salary, employers pay social security tax, mandatory pension contributions, and the fund contributions required by the relevant collective agreement.
General rate of tryggingagjald on all wages. Fishermen attract an extra 0.65%.
Minimum mandatory contribution to the employee’s pension fund. The employee adds at least 4%, for 15.5% in total.
Under most collective agreements, when the employee pays into a voluntary private pension (up to 4%).
Collective agreements also require small employer contributions to union sickness, holiday home, education and rehabilitation funds. The exact rates depend on the agreement.
Build Icelandic pay the way you already structure it, with your own salary components, deductions and formula columns, such as pension and union fund contributions. Want to know how well IceHrm handles payroll calculations for Iceland? Contact us or see Payroll →
Employers in Iceland can generally end employment by giving notice, without a statutory requirement to state a reason. Most collective agreements, however, give employees the right to ask for an interview about the dismissal and a written explanation. Dismissal is restricted for pregnant employees, employees on parental leave and union representatives.
| Continuous service | Notice |
|---|---|
| Less than 1 year | Set by collective agreement |
| 1 year | 1 month |
| 3 years | 2 months |
| 5 years | 3 months |
Iceland has no statutory severance pay. Final pay must include wages for the notice period, accrued holiday pay and any pro-rata December and holiday bonuses due under the collective agreement.
Iceland’s public holidays are set by law and collective agreements. Several follow Easter, and Christmas Eve and New Year’s Eve are half-day holidays from 13:00.
Work on public holidays is paid at special holiday rates set by the collective agreement.
Leave groups give each office its own holiday calendar, so movable holidays and half-days like Christmas Eve are set up once and every employee gets the right time off automatically. Holiday calendars →
Employment terms must be confirmed in writing, and every employee is covered by the collective agreement for their sector. Contracts cannot offer less than that agreement.
Probation is not regulated by statute; collective agreements commonly allow up to 3 months, with a shorter notice period during that time. Successive fixed-term contracts are generally limited to 2 years in total unless there is an objective reason for renewing them.
Send contracts for e-signing, store them on the employee’s record, and track onboarding steps like pension fund and payroll registration with task lists so nothing is missed. Documents & e-signing →
This guide is general information to help you plan HR processes, not legal, tax or financial advice. Employment law and rates change regularly and awards, enterprise agreements and state rules may give employees more than the minimums shown here. Always confirm current requirements with the official sources or a qualified adviser.
Configure leave types, accrual rules and public holidays for Iceland, keep employee records and contracts in one place, and run payroll with your own salary components. Want to know how IceHrm handles payroll calculations for Iceland? Talk to us.
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