EMPLOYEE BENEFITS IN ICELAND

Employee Benefits in Iceland are generally covered by the Labour Code and the Directorate of Labour, and 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. When expanding your company’s presence in a new country, you need to ensure compliance both in your employment contracts and benefit guarantees. 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.

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. This is where Bradford Jacobs steps in to point you in the right direction, drawing on over 20 years of experience as a Professional Employment Organisation (PEO) and Employer of Record (EOR).

What are the Compensation Laws in Iceland?

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

In Iceland, employers need 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 can be improved by collective agreements but not diminished.

  • National Minimum Wage: With no government-mandated minimum wage, employees’ earnings are agreed upon 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 every 12 months; up to five years – four months for every 12 years; after ten years – six months for every 12 months. Employers must 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 8.00 am and 10.00 am 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 the monthly salary per hour overtime for hours above 162.5 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 of leave since January 2021, with one month transferrable between them. Maternity and paternity benefit is 80% of the average salary, capped at ISK 600,000 (€4,126, US$4,660) per month. The monthly maximum for those 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 an 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 is notified in writing. Minimum standards under the 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.

Guarantees and Restrictions on Employee Benefits in Iceland

Guaranteed Benefits:

Mandatory benefits guarantee minimum entitlements for the workforce in Iceland. They are based on the Labour Code, supplemented by individual pieces of legislation as well as collective and trade union agreements, which can enhance provisions. For example, minimum statutory requirements include the following:

  • Maternity / Paternity Leave:  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 the average salary capped at ISK 600,000 (€4,126, US$4,660) per month.
  • Sick Leave:  Employees accrue two days paid sick for each month worked. Entitlement increases with the 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.
  • Working Hours: Normal working hours are 40 over a five-day week. The working day usually begins between 8.00 am and 10.00 am and includes 35 minutes of paid coffee breaks which are taken in two parts.
  • 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.
Restrictions:
  • Maternity Benefit: Mothers must have been in the Icelandic labour market for six consecutive months prior to the birth date. Those not employed must have been residents of Iceland for 12 consecutive months before the due date.
  • Unemployment Benefit: Applicants must be unemployed and actively seeking work in cooperation with a job-seeker consultant; provide a job-search schedule and report to the Directorate of Labor once a month. Applicants must have worked in a full-time position for at least 25% of the preceding three months.

Social Security in Iceland

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

Social security in Iceland is the public pension regime. All Icelanders are members of the system, 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. 

All employers in Iceland must contribute to social insurance as part of their statutory costs. Employers must register with the State Social Insurance Institute (Tryggingastofnun) in order to remit their statutory contributions to the social security and insurance systems. Employers contribute the equivalent of 8.00% of their employees’ taxable income to the state pension fund. Employers also contribute to social insurance, at a rate of 6.10% of employees’ gross income since January 2022.

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