How to hire in Iceland through an EOR

Every employment contract in Iceland must be in writing if it lasts more than one month and requires more than eight hours a week. Missing this — or leaving out key details — can void the contract and expose you to back pay claims and disputes.

Contract types

Most companies use indefinite-term contracts for core roles. They offer stability and full legal protections, which makes sense for ongoing work.

Fixed-term contracts come with strict limits. You can only use them for objective reasons like projects or seasonal needs. Repeating them for the same role without justification converts them to indefinite.

Part-time contracts pro-rate benefits and rights. They're common for flexible roles, but the same rules apply as for full-time employees.

What has to be in the contract

Icelandic law sets out clear requirements. Your contract needs to include parties' names and addresses, job title and duties, start date, duration, workplace, working hours, salary details, holiday entitlement, notice periods, pension info, and any collective agreement reference.

Contracts don't need government registration. They can be in English, but you'll need to provide an Icelandic version if the employee asks. Keep signed copies for five years after employment ends.

Probation can last up to three months. During that period, either side can end the contract with shorter notice, often immediately. After probation, full termination rules kick in and you'll need cause or proper notice.

Contractor vs. employee

Misclassification is a real risk in Iceland. Courts look at control over work, hours, location, payroll handling, and benefit entitlement. If you direct how and when someone works, provide their tools, or fold them into your team, they're likely an employee in the eyes of the law.

Getting it wrong means back taxes, social security payments, unpaid benefits, and fines. You could owe years of contributions plus damages. Labor courts can order reclassification and compensation.

Non-competes are hard to enforce. They need strong justification, like protecting trade secrets, and must be narrow in both time and scope. Courts regularly strike down broad ones.

IP assignment works if you spell it out clearly. Employees own their inventions by default unless the contract says otherwise and ties the work to their duties. For contractors, be explicit about ownership from the start to avoid disputes later.

Iceland sets the minimum at 24 days of paid annual leave. Employees earn two days per month across the vacation year, which runs May 1 to April 30, and you hold back 10.17% of their wages each pay period to cover the cost.

You pay that out as a lump sum when they take leave, typically between May and September. Collective agreements often push this to 25-30 days, particularly once someone has a few years in the field or with your company.

Time off

Employees are entitled to 24 working days of annual leave, accruing at two days per month during the vacation year (May 1 to April 30). You hold back 10.17% of wages each pay period and pay it out when they take the time off.

After five years in the same field, entitlement rises to 25 days with a pay rate of 10.64%. With the same employer, it increases to 27 days after five years and 30 days after ten.

Iceland has around 12-14 public holidays. Most are paid if not worked. If an employee does work on a public holiday, they're entitled to 1.375% of monthly wages per hour.

All leave types

Here's what the law requires. Job protection applies across most leave types, and pay varies depending on tenure and the type of leave.

Parental leave is generous by most standards. Parents share 12 months at 80% pay through the social insurance system. You contribute to that fund as part of your employer obligations, but you don't pay the parental leave directly.

Mandatory benefits

Social security is the main one to understand. Both you and the employee contribute: 4% from you, 4% from the employee, both on gross wages (2025 rates). This covers health, pensions, and family benefits.

Pension contributions are mandatory for everyone. You pay at least 2%, though collective agreements typically bring the total to 11.5% from each side. The combined minimum is 12%.

Health coverage is universal through the social security system. There's no private insurance mandate, but your contributions fund the public system. Iceland doesn't require extras like meal vouchers or transport allowances by law.

Unemployment insurance sits at 0.1-2% for employers, depending on sector.

What people actually expect

Legal minimums won't get you far when hiring in Iceland. Collective agreements cover most jobs, so candidates typically expect 25-30 days of annual leave from the start. Offer less and you'll lose people to companies that are already meeting that norm.

On sick leave, employees expect full pay from day one rather than the statutory tenure-based ramp-up. Parental leave is nearly universal in practice, and stronger employers top up the 80% social insurance payment to reach 100%.

You'll also see expectations around higher pension contributions (15-16% total), flexible hours, and remote work stipends. Around 10,000-20,000 ISK per month for home office costs is common now, particularly in tech.

On health, the public system covers the basics, but candidates in skilled roles often expect company-paid dental, physio, or international coverage for expat families. Meal allowances of 5,000-10,000 ISK per day come up regularly in tech and finance.

Iceland's hiring market is small and word travels. If you're competing for skilled roles, the practical baseline is around 28 days leave, full sick pay, and enhanced pension contributions. That's what most candidates will be comparing you against.

Iceland's employment laws give employers more flexibility than you might expect, but notice periods are where things get complicated. They scale with tenure, and collective agreements often require longer periods than the legal minimum. Get this wrong and you're paying wages for time the employee isn't working.

Firing someone: what's actually allowed

You can terminate an employee with or without cause, and you don't need to justify it in most cases. But there are hard limits on when you can't fire someone, regardless of the reason.

You can't dismiss someone because they've announced maternity, paternity, or parental leave, or while they're on that leave. The same protection applies to pregnant women and women who've recently given birth. You also can't fire someone solely because of family responsibilities, like caring for children, spouses, or relatives in the same household. Trade union members are protected against dismissal based on their union duties, and employees who request corrective measures under equal status laws are protected for one year after submitting that request.

If the company changes ownership, you can't dismiss someone just because of that change, unless there are genuine economic, technical, or organizational reasons requiring workforce changes. Bereavement leave also triggers protection. You can't fire someone who's notified you of bereavement leave or is currently on it, unless you have valid reasons and provide written justification.

Outside these categories, termination is fairly straightforward. Gross misconduct, redundancy, underperformance, long-term illness, and breach of contract are all valid grounds. The key is documenting your reason and following the correct notice period.

Notice periods: where most people slip up

This is where Iceland gets strict. Notice periods are tied to tenure and increase importantly over time. The statutory minimums are set by law, but collective agreements often require longer periods. If your employee is covered by a collective agreement, that agreement's notice period applies, and it's usually longer than the statutory minimum.

Notice must be in writing and takes effect at the beginning of the next month. The employee keeps working during the notice period and retains all rights as a regular worker. One exception: if you're dismissing for gross misconduct, no notice is required. Similarly, an employee resigning due to intolerable working conditions doesn't have to give notice.

In practice, notice periods range from one week to six months depending on the contract or collective agreement, with three months being common. If you're not sure whether your employee is covered by a collective agreement, check with your EOR or a local legal advisor before you do anything. Getting this wrong is expensive.

Severance: there isn't one (usually)

Iceland has no statutory severance pay requirement. Employees aren't entitled to gratuity payments either. Any compensation beyond wages during the notice period only applies if the employment contract or a collective agreement specifically requires it.

That said, if a court finds the dismissal was wrongful, you'll be ordered to pay compensation. The amount depends on length of service, the severity of the breach, and the employee's financial loss. Reinstatement is rarely ordered but is technically possible.

Work permits and visas

We don't have enough reliable detail on Iceland's work permit categories, visa sponsorship requirements, or whether an EOR can sponsor foreign nationals to give you a clear answer here. This matters a lot if you're hiring non-Icelandic employees, and visa rules change frequently and vary by nationality.

Before you make an offer to a foreign national, ask your EOR: Can they sponsor work permits? What's the timeline from job offer to work authorization? Are there restrictions by nationality? Does Iceland have a digital nomad visa? What documentation do you need to provide? Don't assume, verify.

Collective agreements and unions

Collective agreements carry a lot of weight in Iceland. They often override statutory minimums for notice periods, wages, and benefits. If your employee is unionized or covered by a sector-wide agreement, that agreement's terms apply, not just the legal baseline.

Trade union members have specific protections against dismissal based on their union duties. If you're operating in a unionized sector like construction, fishing, or hospitality, expect collective agreements to shape your termination process from the start.

What to do before you fire someone

Document everything. Check the employment contract and any applicable collective agreement to confirm the correct notice period. Written notice should clearly state the effective date, the notice period, and, if you're terminating with cause, the specific reasons. If the dismissal is later challenged, you'll need to show the reason was valid and the process was fair.

If you're unsure about protected categories or notice periods, have your EOR review everything before you send the termination letter. The cost of a wrongful dismissal claim, extended compensation, or legal dispute will far outweigh the cost of getting the process right the first time.