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Employment Agreement Essentials

Understand the key elements of employment contracts in Iceland

Types of employment agreements

In Iceland's labor market, there are two main types of employment agreements: individual employment contracts and collective bargaining agreements.

Individual Employment Contracts

In Iceland, while verbal agreements are allowed, it is recommended to have a written contract for clarity and documentation purposes. A written contract becomes a requirement if the employment lasts longer than a month and averages more than eight hours per week. The employer must provide this written document or confirmation within two months of the employment commencing.

The Icelandic Labour Law outlines the mandatory inclusions in a written contract:

  • Identities of both parties (employer and employee)
  • Workplace location and employer's domicile (or principle location if the work is mobile)
  • Job title, nature, or category of the work performed
  • Start date of employment
  • If temporary, the duration of the employment

It's important to note that individual contracts cannot supersede the minimum requirements set forth in collective agreements. Employees can negotiate for better terms than those outlined in the collective agreements but cannot settle for less favorable conditions.

Collective Bargaining Agreements

Collective bargaining agreements, established between employee unions and employer associations, are very influential in Iceland's labor market. These agreements set the minimum standards for wages, working hours, vacation time, and other employment aspects across various sectors.

Key aspects of Collective Bargaining Agreements include:

  • Incorporation into Individual Contracts: The terms of the applicable collective agreement are automatically incorporated into individual employment contracts for covered employees.
  • Precedence over Individual Contracts: Any terms in an individual contract that provide lower wages or worse working conditions than those stipulated in the collective agreement are null and void.

Essential clauses

Icelandic employment law emphasizes employee protections and well-defined working conditions. To ensure a clear and legally sound agreement for both employer and employee, several essential clauses should be included in Icelandic employment contracts.

Basic Information

  • Parties involved: Clearly identify the employer and employee with their full names and contact information.
  • Position and Start Date: Specify the job title and the official start date of employment.

Terms of Employment

  • Type of Employment: Indicate whether the position is permanent or temporary.
  • Working Hours: Define the standard workweek, including daily hours and any overtime expectations.

Compensation and Benefits

  • Salary: Outline the gross salary amount, payment schedule, and any applicable bonuses or allowances.
  • Paid Time Off: Detail vacation leave entitlement, including the number of days per year and accrual process.
  • Pension: Briefly explain pension contributions as mandated by Icelandic law.
  • Other Benefits: List any additional benefits offered, such as health insurance, parental leave benefits, or company car.

Duties and Responsibilities

  • Job Description: Provide a clear description of the employee's duties and responsibilities.
  • Company Policies: Reference any relevant company policies that the employee is expected to follow.


  • Notice Period: Define the required notice period for termination by either party, adhering to Icelandic labor law standards.
  • Termination Clauses: Outline the grounds for termination with or without notice.

Dispute Resolution

  • Governing Law: Indicate the legal jurisdiction applicable to the employment contract, typically Icelandic law.
  • Dispute Resolution Process: Outline the steps to be followed in case of any disagreements arising from the employment contract.

Probationary period

Probationary periods, also known as trial periods, are a common feature in Icelandic employment contracts. They provide an opportunity for both employers and employees to assess suitability before committing to a long-term working relationship. Icelandic law regulates the use of probationary periods, ensuring fairness for both parties.

Maximum Duration

According to Act No. 262/2006, the Labour Market Act, a probationary period in an Icelandic employment contract cannot exceed three months. However, there is an exception for managerial roles. In some cases, an employer may negotiate a probationary period of up to six months for managerial positions, but this requires specific agreement within the employment contract.

A probationary period is not a legal requirement in Iceland. Employers are not obligated to include one in an employment contract. However, if they choose to do so, they must adhere to the legal maximums.

Purpose of the Probationary Period

The probationary period serves a purpose for both employers and employees. For employers, it allows them to assess an employee's skills, experience, and suitability for the role. They can monitor performance, work ethic, and cultural fit within the team. For employees, probationary periods provide an opportunity to evaluate the job, the work environment, and the company culture. They can determine if the position aligns with their expectations and career goals.

Termination During Probation

During the probationary period, both employers and employees have greater flexibility to terminate the employment relationship. The notice period for termination is shorter compared to after the probationary period ends. During the first three months, only one week's notice is required from either party for termination. This lower notice period allows for a smoother separation if either party decides the employment relationship is not a good fit.

Key Points to Remember

Probationary periods are legal but not mandatory in Iceland. The maximum duration is three months for most positions, and managerial roles may have a negotiated maximum of six months. Both employers and employees can terminate with a shorter notice period during probation.

Confidentiality and non compete clauses

Confidentiality and non-compete clauses are recognized by Icelandic employment law, but they must adhere to specific principles to be enforceable.

Confidentiality clauses are designed to protect an employer's sensitive information, such as trade secrets, customer lists, and proprietary data. Icelandic law permits the inclusion of such clauses in employment agreements, and they are generally enforceable by the courts. The Icelandic Act No. 7/1936 on the Conclusion of Agreements outlines the scope of confidential information, excluding information that is already public knowledge or that becomes public knowledge through no fault of the employee.

Non-compete clauses limit an employee's ability to work for a competitor after leaving the company. Icelandic law takes a balanced approach, recognizing both the employer's interest in protecting its business and the employee's right to pursue a livelihood.

Reasonableness and Duration

Non-compete clauses will only be upheld by courts if they are deemed reasonable. This involves considering factors such as:

  • The employee's position: Clauses are more likely to be enforceable for senior management with access to critical information.
  • The scope of restrictions: The clause cannot geographically restrict the employee's ability to work beyond reasonable limits.
  • The duration: Icelandic courts generally view non-compete clauses exceeding 12 to 24 months for senior employees as excessive.

Employee Compensation

The enforceability of a non-compete clause may be strengthened if the employer compensates the employee for the limitations it places on their future employment opportunities.

Termination Clause

A non-compete clause becomes unenforceable if the employer terminates the employee without fair cause, or if the employee terminates due to a breach of contract by the employer.

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