Employee Benefits in Iceland

Read our comprehensive guide to employee benefits in Iceland to ensure your hiring strategies are effective and aligned with local labor laws.

Iceland is a Nordic island country situated between the North Atlantic and Arctic Oceans. It has a workforce of 240,931 people as of 2023 and a GDP of 31.33 billion US dollars (2023).

The economy of Iceland is fast-growing, with a low tax structure, competitive costs for skilled labor, and high education levels. Iceland’s key industries include aluminium smelting, fishing, and tourism, with its country being rich in natural resources. Employee benefits in Iceland are important, with a vast set of mandatory employee benefits established by Icelandic labor laws.

This guide aims to provide a thorough understanding of labor laws in Iceland, focusing on both mandatory and supplementary employee benefits that employers must provide to workers in Iceland. We’ll also give an overview of how Remote People can help simplify hiring in Iceland via their EOR services and recruitment.

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Icelandic Employment Laws

The Icelandic Labour Law was established by the Icelandic government to ensure basic rights and principles for workers and employers, such as annual leave, social security obligations, maternity/paternity leave, and sick pay.

Other relevant acts determining employee benefits include:

Act on Working Terms and Pension Rights Insurance
Act on Labour Market Measures
Act on the Working Environment
Health and Safety in Workplaces

It’s recommended that employers seek legal advice from legal professionals before employing in Iceland to make sure employees receive all mandatory benefits they are entitled to under Icelandic labor law.

Mandatory Employee Benefits in Iceland

Employees in Iceland are entitled to the following mandatory benefits:

Social Security Contributions

Iceland operates under a Social Security system, which employers must register their employees under.

The Social Security system encompasses the following schemes:

National Pension Scheme providing old-age, invalidity, and survivor’s pensions
Mandatory Employment Pension Scheme providing old-age pension funds between ages 65-70, invalidity pensions, and pensions for surviving spouses/children
Healthcare and Health Insurance schemes
General Family Benefits scheme
Maternity/Paternity Benefits scheme
Unemployment Insurance scheme

Employers and employees are responsible for contributing to the Social Security system, with employers paying 12% of an employee’s gross salary towards this scheme. The employer must pay 8% of this amount, while employees contribute the remaining 4%.

Annual Paid Leave

Workers in Iceland accrue annual leave over time and are entitled to a minimum of 24 paid days of annual leave at full pay.

Employees are paid at their full level of pay and are also entitled to a holiday allowance of 10.17% of their total wages.

Holiday days and allowance increases as follows based on years of service:

Condition	Leave Days	Percentage of Total Wages
5 years in the same line of work	25 days	10.64%
5 years with the same employer	27 days	11.59%
10 years with the same employer	30 days	13.04%

Working Hours

Typical working hours in Iceland are 40 hours per week, spread over 5 days (usually Monday – Friday).

Workers are entitled to a 15-minute coffee break and between 30 minutes and 1 hour for lunch each day.

A minimum rest period of 11 continuous hours per 24 hours is required between work hours.

National Minimum Wage

There is no statutory minimum wage in Iceland – instead, this is determined by collective bargaining agreements across different occupational sectors.

These wages are established by considering the nature of the work involved, seniority of an employee, and education.

Overtime Pay

Overtime hours are paid for any hours worked over an employee’s contracted hours (usually 8 hours a day or 40 hours per week).

The official hourly overtime rate in Iceland is 1.0385% of an employee’s regular monthly wage.

Working hours (including overtime) should not exceed 48 hours per week.

Paid Public Holidays

Employees in Iceland are entitled to paid public holidays, which are separate from annual leave entitlement.

If an employee is asked to work on a public holiday, they will typically be paid at the rate of 1.375% of their monthly salary for each hour worked on that day.

The public holidays in Iceland in 2025 are as follows:

January 1, 2025: New Year
April 17, 2025: Maundy Thursday
April 18, 2025: Good Friday
April 20, 2025: Easter Sunday
April 21, 2025: Easter Monday
April 24, 2025: First Day of Summer
May 1, 2025: Labor Day
May 29, 2025: Ascension Day
June 8, 2025: Whit Sunday
June 9, 2025: Whit Monday
June 17, 2025: Icelandic Republic Day
August 4, 2025: Commerce Day
December 25, 2025: Christmas Day
December 26, 2025: Second Day of Christmas

Christmas and Holiday Bonuses

Fixed holiday bonuses are payable to employees in Iceland.

Christmas bonuses are paid to employees on the 1st of December, and holiday bonuses are paid in the summer months between the 1st of May and the 15th of August.

Bonuses are proportional to the amount of time worked – part-time workers will still receive bonuses, but these will match time worked over the respective year.

Paid Sick Leave

If an employee in Iceland is absent from work due to sickness, they are entitled to paid sick leave.

The following paid days of sick leave apply based on length of service:

Length of Service	Sick Leave Entitlement
Less than 1 year	2 days of sick pay per month
1 year	2 months of paid sick leave
5 years	4 months of paid sick leave
10 years	6 months of paid sick leave

Employees may also be entitled to days of paid leave if a child under the age of 13 is unwell.

Parental Leave

Both parents in Iceland are entitled to 6 months of parental leave each in connection with the following circumstances:

Birth of their child
First-time adoption of a child
Fostering of a child

This is applicable for workers in the private and public sectors, as well as self-employed people.

Employees must have worked in Iceland for 6 months continuously before the birth of the child to be eligible for parental leave. Parental leave is payable at 80% of an employee’s average gross wages in the 12 months leading up to the birth.

Parents may also take an additional 13 weeks of unpaid leave to care for their children, which can be taken before the child in question reaches the age of 8 years old.

Pension

Iceland operates under three key pension pillars:

Social Security System
Occupational Pension System
Supplementary Pension Savings

All workers in Iceland are enrolled in the public pension system operated by the Social Security System, providing mutual insurance and a social safety net for pensioners in Iceland.

Occupational pension funds are based on mandatory memberships of workers between the ages of 16 – 70 and are financed by contributions from both employers and employees.

Supplementary pension savings are voluntary, private pension schemes that require a 2% – 4% contribution of an employee’s salary, with employers paying a matching contribution.

A supplementary pension fund can be accessed if an employee experiences an illness or accident that deems them unable to work or when they reach the age of 60.

Severance Pay

There is no legal requirement for employers to pay severance pay in Iceland upon terminating an employee’s contract.

However, employees are entitled to receive their normal salary and contractual benefits during the notice period.

Some employers may offer severance packages as part of supplementary employee benefits, but they are not required to provide this by law.

Supplementary Employee Benefits in Iceland

It is recommended that employers think about supplementary employee benefits they could offer their workers in Iceland to improve employee retention rates and increase the chances of people applying for job vacancies.

Here are some attractive supplementary employee benefits employers should consider:

Pension opportunities
Performance bonuses
Expenses for transport, accommodation, or food
Healthcare insurances
Severance packages

Optimize Employee Benefits with Remote People

Get help optimizing employee benefits in Iceland with support from Remote People. Our Employer of Record (EOR) services simplify compliance with Icelandic labor laws by handling the legal and administrative tasks involved in hiring.

Hiring in Iceland becomes much easier with our EOR solution—ensuring your employees are hired legally, receive all mandatory benefits, and that your business stays fully compliant every step of the way.

We can also help you to hire talented workers in Iceland with our Iceland recruitment services. Meet the best people for your businesses by working with our leading recruitment agency, who fully understand the intricacies of the Icelandic recruitment space and the Icelandic economy.