Employer of Record Guide in 

Iceland

Vacation Leave

• Standard Entitlement: 24 paid vacation days annually
• Accrual: Earned throughout the year, available for use
• Payout Rules: Must be paid out on termination if unused
• Timing: Employees typically take 3-4 weeks during summer months

Sick Leave

• Entitlement: 2 days per month in the first year of employment
• Accumulation: Unused sick days carry over to subsequent years
• Medical Certification: Required for extended absences
• Payment: Full salary during sick leave periods

Maternity Leave

• Duration: 6 months
• Payment: 80% of average salary
• Funding: Paid through the Maternity/Paternity Fund
• Job Protection: Guaranteed return to same or equivalent position

Parental Leave

• Total Available: 12 months shared between parents
• Distribution:
  • 3 months reserved for each parent
  • 6 months can be shared as parents choose
• Payment: 80% of average salary
• Flexibility: Can be taken part-time or in blocks

Bereavement Leave

• Duration: Varies based on collective agreements
• Typical Provision: 3-5 days for immediate family
• Payment: Usually paid leave
• Extended Leave: Additional unpaid leave may be available

Personal & Family Leave

• Emergency Leave: Available for family emergencies
• Care Leave: For caring for sick family members
• Duration: Typically unpaid, varies by collective agreement
• Job Protection: Position held during approved leave periods

Summary

Termination Types

Termination With Cause:

• Requires serious misconduct or breach of contract
• No notice period required
• Must be well-documented and justified

Termination Without Cause:

• Standard business termination
• Requires proper notice or payment in lieu
• Must follow collective agreement procedures if applicable

Notice Period Requirements

Notice periods in Iceland are based on length of service and are typically longer than many other countries:

Note: Collective agreements may specify longer notice periods.

Severance Pay

Iceland does not have a general statutory severance requirement. However:

• Collective agreements may mandate severance payments
• Long-term employees may be entitled to additional compensation
• Severance may be negotiated as part of termination agreements

Probationary Periods

• Standard Duration: Up to 3 months
• Notice During Probation: 1 week
• Restrictions: Cannot be extended beyond 3 months
• Rights: Employees retain basic rights during probation

Final Pay Requirements

• Timing: Final payment must be made on the final day of employment or next regular payday
• Components: Base salary, unused vacation pay, any outstanding bonuses
• Documentation: Detailed breakdown of final payments required

Anti-Discrimination & Retaliation Laws

Employees cannot be terminated for reasons related to:

• Gender, age, race, religion, or sexual orientation
• Pregnancy or parental leave
• Union membership or activities
• Filing complaints about working conditions
• Disability (with reasonable accommodation)

National Holidays (2025)

Iceland observes 16 public holidays annually, reflecting both Christian traditions and unique Icelandic celebrations:

Holiday Pay Rules

• Eligibility: All employees entitled to holiday pay
• Rate: Regular daily wage
• Work on Holidays: Premium pay rates apply (typically double time)
• Substitute Days: If holiday falls on weekend, substitute day provided

Cultural Observances

• First Day of Summer: Unique Icelandic celebration marking end of winter
• Christmas Season: Extended celebration from December 24-26
• National Day: Celebrates independence from Denmark (1944)

Required Documentation for Employment

• Employment Contract: Must include salary, working hours, vacation entitlement, notice periods
• Work Permit: Required for non-EEA citizens
• Tax Registration: Icelandic tax number (kennitala)
• Bank Account: Icelandic bank account for salary payments
• Pension Fund Registration: Mandatory enrollment in occupational pension scheme

Language Requirements

• Official Language: Icelandic
• Business Language: English widely used in international companies
• Contract Language: Employment contracts typically in Icelandic with English translation
• Workplace Communication: English acceptable in most professional environments

Background Checks & References

• Legality: Background checks permitted with employee consent
• Types Allowed:
  • Criminal background (for relevant positions)
  • Employment verification
  • Educational credentials
  • Professional references
• Privacy Compliance: Must comply with GDPR and Icelandic data protection laws

Data Protection & Privacy

• GDPR Compliance: Iceland follows EU data protection standards
• Employee Consent: Required for data collection and processing
• Data Storage: Must be secure and purpose-limited
• Cross-Border Transfers: Restricted outside EEA without adequate protections

IP Assignment & Confidentiality

• Default Ownership: Employees own work-related intellectual property unless contract specifies otherwise
• Assignment Clauses: Must be explicit in employment contracts
• Confidentiality: Standard confidentiality clauses enforceable
• Non-Compete: Limited enforceability, must be reasonable in scope and duration

Probation Period Setup

• Maximum Duration: 3 months
• Performance Reviews: Regular check-ins recommended
• Documentation: Clear performance expectations and feedback
• Termination Rights: Simplified termination process during probation

Onboarding Timeline

What the EOR Handles

Borderless AI manages:

• Employment contract preparation and execution
• Tax registration and compliance
• Pension fund enrollment
• Payroll setup and processing
• Local legal compliance
• Documentation in Icelandic language

Worker Classification: Employee vs. Contractor

Iceland has strict enforcement of proper worker classification with significant penalties for misclassification.

• Employee Indicators: Regular schedule, employer-provided tools, integration into business operations, financial dependence
• Contractor Indicators: Project-based work, own tools/equipment, multiple clients, business risk
• Penalties: Back taxes, social contributions, and potential fines for misclassification
• Testing Criteria: Courts examine economic reality of relationship, not just contract terms

Note: When in doubt, err on the side of employee classification to avoid legal complications.

Unionisation & Collective Agreements

Iceland has one of the highest unionisation rates globally, with over 85% of workers belonging to unions.

• Coverage: Most industries covered by collective agreements
• Negotiation: Wages, working conditions, and benefits negotiated collectively
• Compliance: Employers must follow applicable collective agreements
• Strike Rights: Strong tradition of labour action to enforce agreements

Cultural Norms & DEI Expectations

Icelandic workplace culture emphasises equality, work-life balance, and consensus-building.

• Gender Equality: Iceland consistently ranks #1 globally for gender equality
• Work-Life Balance: Strong emphasis on family time and personal well-being
• Flat Hierarchies: Informal, egalitarian management styles preferred
• Environmental Consciousness: Sustainability and environmental responsibility highly valued
• Communication Style: Direct but respectful, consensus-oriented decision making

Remote Work Considerations

Remote work is well-established in Iceland with strong legal protections for remote employees.

• Equal Treatment: Remote workers entitled to same benefits and protections
• Equipment: Employers typically provide necessary technology and equipment
• Health & Safety: Employer responsibility extends to home office environments
• Tax Implications: Same tax treatment regardless of work location within Iceland
• International Remote: Complex tax and social security implications for employees working from other countries

Anti-Discrimination Laws

Iceland has comprehensive anti-discrimination protections covering:

• Protected Characteristics: Gender, age, race, religion, sexual orientation, gender identity, disability, nationality
• Workplace Harassment: Zero tolerance policies required
• Equal Pay: Strong equal pay legislation with transparency requirements
• Accommodation: Reasonable accommodation required for disabilities
• Enforcement: Active government enforcement with significant penalties

Writer's Note: Please double-check all specific rates, dates, and regulatory details as this information may require verification against current Icelandic employment law sources.