Iceland Employee Benefits

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Employee Benefits

Happy and satisfied employees make your businessthrive and lead to even better profits. However, the specific benefits for employees in Iceland might not all be familiar to you yet. By using our PEO and EOR service we can provide compliant labor contracts for employees in Iceland including local benefits.

When expanding your company’s presence in a new country, you need to ensure compliance both in your employment contracts and benefit guarantees. These involve social security contributions, sick leave, health insurance, and unemployment, to name a few.

What are Employee Benefits in Iceland?

Benefits and entitlements in Iceland are generally covered by the Labor Code and the Directorate of Labor, administered by the Ministry of Social Affairs. Specific legislation also applies in many areas of employment. In addition, Collective Bargaining Agreements (CBAs) and trade unions have a strong influence in Iceland, representing close to 90% of the workforce.

Foreign companies hiring employees in Iceland must operate within this complex framework of legislation and collective agreements that provide safeguards and guarantees for the workforce. Minimum guarantees include:

  • Minimum wages
  • Paid vacations
  • Working hours
  • Termination, severance, and notice periods
  • Sick leave
  • Maternity allowances and benefits

The responsibilities of foreign companies reach further than simply complying with tax, social security, and payroll regulations. Failure to comply with specific regulations applying to benefits and entitlements runs the risk of fines and sanctions. It is vital that employers have a firm grasp of what is guaranteed for their employees, as this will affect the employer-employee relationship.

What Compensation Laws exist in Iceland?

The obligations of employer and rights of employees are covered in general by Iceland’s Labor Code. Employees’ entitlements are further enhanced by Collective Bargaining Agreements (CBAs) and trade unions, which account for close to 90% of the workforce.

Iceland is not a member of the European Union (EU) but is a member of the European Economic Area (EEA). In some employment areas, EU directives have an influence as EU labor agreements are part of the EEA Agreement.

Apart from the Labor Code, specific legislation regarding employees’ compensation, benefits and entitlements includes Acts covering: Working Time Terms and Pension Insurance Rights; Working Environment, Health and Safety; Gender Autonomy; Equal Treatment in the Labor Market; Equal Treatment Regarding Race and Ethnic Origin; Equal Rights and Status of Men and Women.

Whether through legislation or collective agreements, employees are protected regarding: Minimum wages, paid vacations; working hours; termination, severance, and notice periods; sick leave; maternity and paternity allowances and benefits.
In Iceland it is vital for employers to be up to speed with responsibilities to their staff over benefits, compensation, and minimum requirements. Do not take the risk of paying penalties for ignoring these responsibilities!

Compensation, entitlements, and benefits include the following, all of which can be improved by collective agreements, but not diminished.

  • National Minimum Wage:  With no government-mandated minimum wage, employees’ earnings are agreed contractually or set by Collective Bargaining Agreements (CBAs) and trade union negotiations. For example, in 2021 one of the largest workers’ unions, Efling, set a minimum gross monthly wage for its full-time workers over 18 years old of ISK 351,000 (€2,410, US$ 2,720). The average monthly salary in 2021 after tax was roughly ISK 410,000 (€2,815, US$3,175).
  • Sick Leave and Benefit:  Employees earn two days paid sick for each month worked. Entitlement increases with length of employment: After one year – two months for each 12-month period; up to five years – four months for each 12-year period; after 10 years – six months for each 12-month period. Employers are required to continue paying wages during sick days for an agreed period, after which the employee may be entitled to payments from the Health Insurance Department (Sjúkratryggingar ĺslands). Full cash benefits per day are ISK 1,873 (€13, US$14.50).
  • Working Hours and Breaks:  Normal working hours are 40 over a five-day week. The working day usually begins between 8.00am and 10.00am and includes 35 minutes of paid coffee breaks which are taken in two parts. Employees are entitled to 11 hours of continuous rest between workdays, considering time spent travelling to and from work. Sundays should always be free.
  • Overtime:  Extra pay for extra hours worked is calculated as 0.875% of the monthly salary per hour for up to 162.5 hours of overtime during the month. The rate is 1.0385% of monthly salary per hour overtime for hours above 162.5 in a month.
  • Paid Vacations: Full-time employees are entitled to 24 days annual paid vacation, based on two days holiday for each month worked during the ‘holiday year’ that runs from May 1 till April 30. Employees are also entitled to a holiday allowance, based on a minimum of 10.17% of the monthly wages, although collective agreements can allow for higher amounts. The allowance is taxable. When an employee leaves, the employer pays the outstanding balance of the holiday allowance
  • Maternity / Paternity / Parental Leave and Benefit:  Men and women have equal entitlement to 12 months leave since January 2021, with one month transferrable between them. Maternity and paternity benefit is 80% of average salary capped at ISK 600,000 (€4,126, US$4,660) per month. The monthly maximum for those who are not employed is ISK 80,341 (€552, US$623). Apart from maternity and paternity leave, parents are entitled to one period of unpaid parental leave lasting 13 weeks until the child is eight years old.
  • Termination and Severance:  Employers and employees have equal right to terminate their relationship. Notice of termination must be given in writing, with the termination/resignation period starting at the beginning of the following month. The employee has the right to request an interview with the employer regarding the reasons for dismissal. Employment cannot be terminated during maternity, paternity or parental leave without due cause and a written justification from the employer. There is no legal right to severance pay in Iceland, but this may be covered contractually or by collective or trade union agreements.
  • Notice Periods:  Notice periods begin on the first day of the month after the employee or employer are notified in writing. Minimum standards under legislation are: Up to one year of service – one month; up to three years – two months; over five years – three months. Collective and trade union agreements allow for increased periods of notice.

Social Security in Iceland

Icelandic Health Insurance (IHI) is available for everyone who has been in Iceland for six months, regardless of nationality, as they will have automatically been enrolled in the social insurance system. Citizens from European Union and European Economic Area members can apply for membership of the system from the day they register their legal residency.

Social security in Iceland is the public pension regime. All Icelanders are members of the system, which is administered by the State Social Security Institute, under the provisions of the Social Security Act.

Employers and employees contribute taxes to the social insurance system. The contribution for employers from January 2022 is 6.10% on salaries and all remuneration. Employers, 8.0%, and employees, 4.0%, also contribute to the pension fund.