Employer of Record in Iceland

An Employer of Record (EOR) in Iceland is a company that legally hires employees on your behalf. This means you can build a team in Iceland without setting up a local legal entity. The EOR handles all the administrative and legal parts of employment, like payroll, taxes, benefits, and compliance with Icelandic labor laws. You manage your team's day-to-day work, while the EOR takes care of the rest. For companies looking to hire talent in Iceland, an EOR like Rivermate provides a simple way to do so quickly and legally.

How an Employer of Record (EOR) Works in Iceland

Using an EOR in Iceland simplifies the hiring process. Here is how it typically works:

1. You Find the Talent: You select the candidate you want to hire in Iceland.
2. The EOR Hires Them: The EOR legally employs the person through a local, compliant employment contract.
3. Onboarding is Handled: The EOR manages the entire onboarding process, ensuring all necessary paperwork is completed according to Icelandic law.
4. Payroll and Taxes are Managed: The EOR processes payroll in the local currency (Icelandic Króna), withholds the correct taxes, and handles social security contributions.
5. Compliance is Ensured: The EOR stays up-to-date with Iceland's labor laws, keeping your employment practices compliant.
6. You Manage Your Employee: You direct your employee's daily tasks and responsibilities, focusing on your business goals.

Benefits of Using an EOR for Hiring in Iceland

Using an EOR to hire in Iceland offers several key advantages. It allows you to enter the Icelandic market and hire talent much faster than if you were to establish your own local company. This saves you significant time and money.

• Avoids Local Entity Setup: You can hire employees in Iceland without the cost and complexity of creating a subsidiary or branch office.
• Ensures Legal Compliance: EORs are experts in Icelandic labor law, so you don't have to be. They manage the risk of non-compliance.
• Simplifies Payroll and HR: The EOR handles all payroll, tax, and HR administration, freeing you to focus on your core business.
• Faster Market Entry: You can onboard new employees quickly, sometimes in just a few days, allowing you to start operations sooner.
• Attracts Top Talent: Offering compliant contracts and benefits through an EOR can make your company more attractive to skilled professionals in Iceland.

Rivermate's transparent pricing model eliminates complexity with a single, competitive monthly fee per employee. Unlike traditional PEO providers, our pricing in Iceland includes comprehensive HR support, benefits administration, compliance management, and access to our proprietary dashboard for real-time workforce analytics. No hidden costs, no setup fees—just straightforward pricing that scales with your business needs while ensuring full legal compliance in Iceland.

Hiring in Iceland is straightforward, with a strong emphasis on worker protections and collective bargaining agreements. The workforce is highly skilled and English proficiency is common, especially in professional sectors. The legal framework is robust, so understanding the local labor laws is key to a smooth hiring process. This guide will walk you through the essentials of hiring in Iceland.

Employment contracts & must-have clauses

While verbal agreements can be binding, you should always provide a written employment contract. This protects both you and your employee. Contracts can be for a fixed term or an indefinite period. Icelandic law, supplemented by collective bargaining agreements, mandates that certain clauses be included in every employment contract.

Here are the essential clauses to include:

• Identification of Parties: Full names and addresses of both the employer and the employee.
• Job Title and Description: A clear outline of the employee's role and responsibilities.
• Start Date: The official start date of the employment.
• Workplace: The primary location where the employee will work.
• Working Hours: The standard daily and weekly working hours.
• Salary and Remuneration: Details of the base salary, payment frequency, and any additional benefits.
• Holiday Entitlement: Information on annual leave.
• Notice Periods: The required notice for termination by either party.
• Reference to Collective Agreements: A statement identifying the relevant collective agreement that governs the employment terms.

Probation periods

Probationary periods in Iceland are typically up to three months. This period allows both you and the new hire to assess the fit. Any probationary period must be agreed upon in writing within the employment contract. During this time, the notice period for termination is often shorter.

Working hours & overtime

The standard workweek in Iceland is 40 hours, usually worked over five days. Overtime pay is required for any hours worked beyond the standard. The overtime rate is typically calculated as a percentage of the employee's regular pay. Collective agreements often have specific provisions for overtime, so it's important to be aware of the relevant agreement for your industry.

Public & regional holidays

Employees in Iceland are entitled to paid time off for public holidays. The country celebrates a number of national and religious holidays throughout the year.

Here is a list of the public holidays in Iceland:

• New Year's Day
• Maundy Thursday
• Good Friday
• Easter Monday
• First Day of Summer
• Labour Day
• Ascension Day
• Whit Sunday
• Whit Monday
• Icelandic National Day
• Commerce Day
• Christmas Eve (from 1 PM)
• Christmas Day
• St. Stephen's Day
• New Year's Eve (from 1 PM)

Hiring contractors in Iceland

You can engage independent contractors in Iceland for specific projects or services. These individuals are self-employed and responsible for their own taxes and social security contributions.

However, it is crucial to correctly classify workers. If a contractor is deemed to be an employee in all but name, you could face significant penalties. This is known as misclassification.

The key distinction lies in the level of control and independence. An independent contractor typically:

• Works autonomously.
• Uses their own tools and equipment.
• Can work for multiple clients.
• Sets their own work hours.

An Employer of Record (EOR) can help you mitigate the risks of misclassification. An EOR can hire employees on your behalf, ensuring compliance with all local labor laws and regulations. This allows you to access the talent you need without the legal and administrative burden of setting up a local entity.

In Iceland, your pay is handled in a straightforward way. Employers take care of deducting taxes and other contributions directly from your paycheck. This system is known as Pay-As-You-Earn (PAYE). This means you get your net pay without needing to handle these payments yourself. The country's strong reliance on collective bargaining agreements, rather than a national minimum wage, shapes the compensation landscape.

Payroll cycles & wage structure

In Iceland, you are typically paid monthly, with your salary for the previous month arriving by the first of the next month. Some industries might pay weekly or bi-weekly, but monthly payments are the most common.

There is no official government-mandated minimum wage. Instead, labor unions and employer associations negotiate minimum wages through collective agreements. These agreements set the wage standards for different sectors.

Instead of a 13th-month salary, you will receive two annual bonuses:

• Vacation Bonus: Paid between May 1st and August 15th.
• December Bonus: Paid on December 1st.

Overtime & minimums

A standard workweek in Iceland is 40 hours. Any work you do beyond these hours is considered overtime. The pay rate for overtime is 1.0385% of your monthly salary for each hour worked.

Employer taxes and contributions

Employers in Iceland are responsible for several contributions based on your gross salary. These payments fund social programs and your pension.

Employee taxes and deductions

Your main deduction from your salary is for your pension and income tax. You are required to contribute to a pension fund.

Income tax is progressive, meaning the rate increases with your income. The total tax rate includes both a state tax and a municipal tax.

Your income tax is calculated in brackets:

In Iceland, benefits and leave are generous. The system prioritizes work life balance, giving you and your team time to rest and recharge. You get a minimum of 24 days of paid vacation each year. Plus, there are public holidays. When it comes to family, Iceland offers extensive parental leave. Both parents get six months of leave. Sick leave is also well defined and increases with your time at a company.

Statutory leave

You are entitled to a few types of leave in Iceland. These are the legal minimums. Many companies offer more through collective agreements.

• Annual Leave You get at least 24 paid vacation days a year. That's two days for every month you work. Your vacation pay is 10.17% of your total wages.
• Parental Leave Each parent receives six months of leave for a new child. You can transfer one month to the other parent. This leave is paid at 80% of your average income, up to a cap.
• Sick Leave If you get sick, you get paid time off. In your first year with a company, you earn two sick days per month. After a year, this increases to two months of paid sick leave. The longer you stay with your employer, the more sick leave you get. After five years, you get four months, and after ten years, it's six months.

Public holidays & regional holidays

There are no regional holidays in Iceland, only national public holidays. Here are the public holidays for 2025:

Typical supplemental benefits

Iceland has a strong social security system. But many employers offer extra benefits. These are often part of collective bargaining agreements.

How an EOR can help with setting up benefits

Setting up benefits in a new country can be tricky. An Employer of Record (EOR) makes it simple. We handle everything for you.

An EOR helps you:

• Stay compliant. We make sure your benefits packages meet all of Iceland's legal requirements. This includes national laws and collective agreements.
• Save time. You don't have to research and manage benefits yourself. We do the heavy lifting.
• Offer competitive packages. We know the local market. We can help you create a benefits plan that attracts and keeps great talent.
• Manage everything. From health insurance to pension plans, we take care of all the administration.

Using an EOR means you can focus on growing your business. You can be sure your team in Iceland is happy and well taken care of.

When you part ways with an employee in Iceland, you need to follow a clear and fair process. It’s not just about saying goodbye. It’s about handling the final steps of their employment correctly and respectfully. This involves giving proper notice, understanding the rules on final pay, and making sure all legal requirements are met. A smooth offboarding protects your business and maintains a positive reputation.

Notice Periods

In Iceland, both you and your employee can end an employment contract. You just need to provide written notice. The length of the notice period usually depends on how long the employee has worked for your company. Collective bargaining agreements often set these periods.

Here are the typical minimum notice periods you must give:

Keep in mind that collective agreements can require longer notice periods, especially for employees with many years of service or in specific roles.

Severance Pay

Icelandic law does not require you to pay severance in most termination cases. Instead, employees receive their regular salary and benefits during the notice period. This is true whether they work during this time or not.

However, some collective agreements or individual employment contracts may require additional payments. This is most common in cases of redundancy or for employees with a long history with the company. Always check the specific agreements that apply to your employees to see if you owe any extra pay.

How Rivermate Handles Compliant Exits

Navigating employee terminations in a foreign country can be complex. We make it simple. At Rivermate, we ensure every offboarding in Iceland is handled correctly and in full compliance with local laws.

Here’s how we help:

• Expert Guidance: We provide clear, straightforward advice on all termination procedures.
• Compliance Checks: We review every step to ensure it meets the requirements of Icelandic labor laws and any applicable collective agreements.
• Documentation: We handle all necessary paperwork, from the written notice of termination to the final pay documentation.
• Risk Reduction: By ensuring a compliant process, we help you avoid legal disputes and protect your business.

We manage the details so you can focus on running your business.

Navigating the world of visas and work permits in Iceland can seem complex. If you are not a citizen of a European Economic Area (EEA) or European Free Trade Association (EFTA) country, you will need a residence permit based on work before you can legally start your job. This process involves both you and your employer. The permit is tied to your specific role and employer, so changing jobs means you will need a new permit.

Employment visas & sponsorship realities

An Employer of Record (EOR) can be a practical way to hire employees in Iceland without setting up your own legal entity. An EOR can sponsor work permits for non-EEA/EFTA nationals, but there are some realities to consider.

What an EOR can typically sponsor:

• Standard Work Permits: The most common route is for full-time employment. The EOR, as the legal employer, handles the application process.
• Permits based on expertise: If your role requires specialized knowledge, this can be a viable route for sponsorship.
• Permits due to labor shortages: In some sectors with a shortage of local talent, sponsorship may be more straightforward.

What an EOR generally cannot sponsor:

• Freelancers or independent contractors: Sponsorship is typically for employees, not self-employed individuals.
• Roles that don't pass the labor market test: A key requirement for sponsorship is proving that the position could not be filled by a candidate from Iceland or the EEA/EFTA.

The most practical route for securing a work permit is through a job offer from an Icelandic employer or an EOR. The application process is a joint effort between you and the employer, submitted to the Directorate of Immigration. Be prepared for processing times that can take several months.

Business travel compliance

For short-term business trips, the rules are more relaxed. Iceland is part of the Schengen Area, which allows citizens of many countries, including the United States, to enter for up to 90 days for business or tourism without a visa.

However, it is crucial to understand what "business" means in this context to stay compliant.

Permitted activities on a business trip usually include:

• Attending meetings and negotiations
• Participating in conferences or seminars
• Conducting research or exploring business opportunities

You cannot engage in paid employment during a business trip. If you plan to work in Iceland, even for a short period, you will likely need a work permit. Always check the specific rules for your nationality before you travel.