Companies undertaking their Global Expansion into Iceland need a complete grasp of Icelandic employment contract laws. A successful business largely depends on its employees. By creating work contracts that include the right terms and benefits there will be no misconception and the perfect work-life balance can be created for your workforce.

Thanks to our PEO and EOR services, we can provide compliant labour contracts for your employees in Iceland, including local benefits. Our team keeps track of Icelandic laws and regulations daily to be duly aware of updates that can be implemented in working contracts and to ensure a smooth entry for your business into the Icelandic economy.

The different types of Icelandic Employment Contracts

Apart from specific terms, employees must be given their written contract or formal agreement within two months of starting work. The mandatory information required for all contracts includes identities and addresses of all parties, employment start date, place and type of work, working hours, annual leave, notice periods, type of contract and any trial period.

Oral agreements are valid but not advised. There is no legal requirement for contracts to be in Icelandic or any particular language; the terms should be in a language fully understood by all parties. The main types of employment contracts are:

Open-ended, Permanent, Indefinite Employment Contracts: This is the standard type of contract that can be terminated, under the rule of law, without giving a reason. Employees are hired without time limits, and the contract is terminated with a notice period, as stipulated by the law or collective agreement, in the same language as the contract.

Fixed-term Employment Contracts:  These are for a specific period and cannot exceed 24 months, including renewals, except for managerial personnel with no time limit.

Temporary Work Agency Employment Contracts:  These are permitted, but the worker cannot be hired out by a company they had worked for directly in the previous six months.

Probationary or Trial Periods: These cannot exceed three months. As there is no provision under labour law for trial periods, these are governed by business practice or collective agreements.

Collective Bargaining Agreements (CBAs):  It is estimated that collective agreements cover nearly 90% of Icelandic workers. Collective and trade union agreements add more detail to the employment terms of wage earners than basic legislation. Employer-employee negotiations that undercut collective contracts are invalid, although employees can negotiate for improved terms over the collective agreement.

The Confederation of Icelandic Employers negotiates on behalf of employers; the State Negotiating Committee confers with state employees, while the Municipal Wage Committee engages in talks with unions representing their members. The Icelandic Confederation of Labour is an umbrella organisation for employees in the general labour market.

Icelandic Employment Contracts Requirements

Internationally minded companies hiring employees in Iceland must operate within a legislation framework supplemented by collective and trade union agreements. Iceland is not a member of the European Union (EU) but has a strong relationship with the economic bloc through its membership in the European Economic Area (EEA). In some employment areas, EU directives influence as EU labour requirements is part of the EEA Agreement.

Most aspects of employment law in Iceland come under the Labour Code and the Directorate of Labour, but specific legislation also applies in many areas. Collective Bargaining Agreements (CBAs) and trade unions strongly influence in Iceland, where such arrangements cover around 90 per cent of the workforce.

These considerations come into play during the first stages of hiring, onboarding, and drawing up contracts with your new employees. General requirements applying to all contracts include:

  • Contracts are invalid if they offer inferior terms to those stipulated by law or collective agreements
  • Employers intending to hire an employee for more than one month and to work eight hours a day must provide a written contract or statement outlining the fundamentals of the role. Oral agreements are permitted under law but not advisable.
  • The contract must be given to the employee within two months of starting work.
  • The contract agreement should include names of all parties; start date and, in case of a fixed-term contract, the end date; any trial period; salary and benefits; working hours and breaks; vacation entitlement; termination and notice periods; applicable collective or trade union agreements.
  • Terms of the contract must comply with minimums set out by collective agreements.
  • Employers applying for work permits for foreign nationals must supply an employment contract with the application.
  • Contracts for non-EU or EEA citizens must include details of their valid work permits and visa.
  • The typical contract is open-ended; fixed-term contracts are allowed. Successive fixed-term contracts should not generally exceed a total of 24 months, although there is no limit for managerial personnel. Probation periods must not exceed three months.
  • There is no legal requirement for contracts to be drawn up in Icelandic.


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