Key Takeaways

  • An EOR provides companies with administrative and legal support in the form of payroll and tax management.
  • Using an EOR is often more cost-effective than setting up a legal entity.
  • The cost of an EOR depends on the complexity of the service provided and the number of employees on the company’s payroll.
  • When choosing a provider, companies must consider their specific organizational goals and select a provider that can best support these.

Thinking about hiring an Iceland-based team? Here we explain how you can save time and money on Iceland hiring with an Iceland Employer of Record (EOR) solution.

Table of Contents show

What is an Iceland Employer of Record?

An Employer of Record (EOR) in Iceland acts as the official employer for your workforce, managing legal, HR, and administrative responsibilities while you retain control over day-to-day tasks and performance. With Iceland’s strong economy, focus on sustainability, and innovation-driven market, an EOR simplifies hiring, payroll in Icelandic Króna (ISK), tax compliance, and employee benefits—allowing businesses to expand seamlessly without establishing a local entity.

Why Partner with an EOR in Iceland?

  • Access to Skilled Talent: Tap into Iceland’s highly educated workforce, known for expertise in tech, renewable energy, and creative industries.
  • Streamlined Compliance: Navigate Iceland’s evolving labor laws and tax regulations with expert oversight, avoiding costly errors.
  • Efficient Payroll in ISK: Ensure employees are paid accurately and on time while managing currency fluctuations and local tax obligations.
  • Fast-Track Expansion: Bypass the lengthy process of entity setup and start operating in Iceland almost immediately.

Expanding into Iceland with an EOR allows businesses to harness the country’s innovation-driven economy and sustainable growth sectors while minimizing administrative burdens and focusing on strategic initiatives.

Ready to get started with an Iceland EOR?

Let us handle the complexities of hiring, compliance, and payroll in Iceland while you focus on growing your team.

  • Hire employees in Iceland with an Iceland EOR
  • No local entity is needed
  • Pricing starts at USD 199 per employee
  • Remote People can also help you find the best talent in Iceland

👉 Get Your Customized Iceland EOR Proposal Today!

How Does an Iceland Employer of Record Work?

Iceland EOR

An Iceland EOR arrangement accelerates market entry while reducing administrative overhead, especially when dealing with Iceland’s unique labor environment, which is heavily influenced by collective bargaining agreements and union participation.

In this model, the EOR generally takes on the following responsibilities:

  • Drafting and signing employment contracts in alignment with Iceland’s labor standards and collective bargaining agreements
  • Running payroll in Icelandic króna (ISK), including withholding income taxes and pension contributions for the Directorate of Internal Revenue
  • Registering employees for social security and mandatory health insurance
  • Ensuring compliance with health and safety regulations under the Act on Working Environment, Health and Safety in Workplaces
  • Providing additional HR support such as visa and Iceland recruitment assistance. 

Iceland’s labor laws are shaped by strong unions and negotiated wage agreements, so the EOR company remains current on any updates or changes that can affect employee compensation and working conditions. This vigilance helps foreign companies avoid legal or financial penalties that may arise from non-compliance with collective bargaining terms and statutory requirements. By monitoring adjustments to tax rates, pension obligations, and employer responsibilities, the EOR minimizes administrative risk.

Iceland Employer of Record vs Iceland Entity

An EOR service in Iceland can be used as an alternative to setting up a legal entity. The EOR acts as a legal employer, assuming all liability for the company. The EOR will shoulder all administrative and legal duties, including managing payroll, hiring talent, and ensuring tax compliance, affording companies the freedom they need to prioritise their core activities.

EORs are often a cost-effective method of operating in Iceland as they do not require companies to have a legal entity, thus saving the company substantial costs relating to hiring office space and workplace facilities. EORs also provide companies with crucial legal support, protecting them against financially and reputationally damaging non-compliance penalties.

Is an Employer of Record in Iceland Legal?

It is legal for companies to use an EOR in Iceland, provided the EOR remains compliant with all relevant labor and taxation laws.

How Much Does an Iceland Employer of Record Service Cost?

The cost of an EOR in Iceland heavily depends on the company’s size and the service’s complexity. The EOR provider will generally charge a set monthly fee, which can be structured as a percentage of the employee’s salary (typically 10%/20%) or as a flat fee. The monthly fee for an EOR in Iceland typically ranges between €500 and €1200 per employee.

Many EORs also charge a one-time setup fee, which covers all administrative costs, such as registering and onboarding employees.

Some services including payroll, benefits administration and tax management may be charged as an additional fee if not already included in the provider’s monthly service fee.

How Does an Iceland Employer of Record Help with Payroll and Taxes?

EORs are experts in managing payroll and ensuring tax compliance. The EOR will ensure that employees are paid accurately and on time and that all end-of-year tax obligations are met. Some EORs may also offer a centralized HR platform in which companies can easily access and manage employee payroll.

How Does an Iceland Employer of Record Help with Benefits Administration?

Under Icelandic law, employees are entitled to mandatory benefits, including annual leave, sick leave, maternity leave, health insurance, and worker’s compensation. Using their legal expertise, EORs will ensure that employees receive these benefits when required. The EOR will also assist companies in crafting attractive supplementary benefits packages. 

What Labor Laws Apply to Hiring in Iceland?

Labor relations, working conditions and employer obligations in Iceland are governed by various legal framework including: the Act on Employment Contracts (Lög um ráõningarsamninga), the Working Environment Act (Lög um vinnuvernd) and the Act on Labor Rights (Lög um vinnuréttindi).

The labor law does not determine a statutory minimum wage. Instead, collective bargaining agreements are commonly used to set wage standards pertaining to specific sectors.

Employment Contracts

Icelandic Labor Law requires that employment contracts be in writing, covering key details such as employer-employee obligations, job descriptions, working hours, salaries, and termination procedures. Fixed-term contracts and collective agreements must be formalized in writing. Employment contracts in Iceland are legally enforceable once signed by all parties involved and are written in Icelandic, the local language. 

Working Hours

Icelandic employees work 40 hours a week or eight hours a day from Monday to Friday. Employers cannot schedule a workday beyond 13 hours. Every employee must be given a 15-minute “coffee break” and should receive at least 11 hours of rest for every 24 hours. Offices start the workday between 8 AM and 10 AM. 

Overtime

Work performed outside of the eight-hour standard is considered overtime unless otherwise stated in the employment contract. Overtime pay is based on a percentage of an employee’s hourly wage. In most instances, the rate is negotiated in collective agreements but is generally 1.0385% of the hourly wage. For night shifts, the rate is higher and amounts to 0.875% of the hourly monthly salary for the first 162 hours. Thereafter, it is calculated at a rate of 0.9375% of the monthly salary.

Probation Period

The probation period is called prófunartími in Iceland, and while it is not a statutory requirement, it is common practice for most employers when hiring new staff. Icelandic probation periods are typically 3 months, allowing the employee and employer to evaluate the employment arrangement in terms of work duties and cultural fit. 

If the employer wishes to dismiss the employee on probation, they must issue a formal notice based on Iceland’s labor law. Icelandic workers on probation must receive the same salaries and benefits as permanent employees. This includes social security and annual paid leave. 

The probation period can be extended, but only upon agreement between the employer and employee. The extension cannot exceed six months. 

Social Security

Iceland’s social security system consists of three pillars: social security, occupational pension, and supplementary pension savings. The employer and employee contributions are as follows: 

Shared Contributions

  • National Pension: 15.5% (11.5% for employers and 4% for employees) 
  • National Health Insurance: Residents of more than six months are automatically covered by Icelandic health insurance. Employees must be registered with the Icelandic health insurance system. 
  • Employment Insurance: Unemployment benefits total 70% of the average total benefits. 

Employer-Only Contributions

  • Workers’ Compensation Insurance: Injuries sustained from accidents at work are covered by Icelandic Health Insurance. 
  • Severance Pay: There is no mandatory requirement for severance pay in Iceland. 

Non-Compliance

Violating Iceland’s working hour regulations will result in administrative fines of ISK 5,000,000. Penalties are more severe for repeat offenses and the length of the violation. 

Payroll and Employment Taxes in Iceland

Payroll Compliance 

Employers must report and remit taxes and social security to the Directorate of Internal Revenue (RSK) in Iceland. Wage reports and taxes are withheld monthly as per labor laws. Failure to adhere to local payroll regulations will lead to penalties, such as fines.

Minimum Wage

There is no minimum wage established by the government in Iceland. Instead, minimum wages are negotiated through collective bargaining. Where employees are covered by a trade union, the agreed-upon minimum wage is around ISK 454,977 per month. Based on such agreements, employees are entitled to a 3.5% wage increase every year. 

Income Tax

Iceland manages income tax and municipal tax through a PAYE, or pay-as-you-earn, system. Income tax is based on income brackets, so, for example, employees who earn up to ISK 472,005 per month pay an income tax of 31.49%. Income of more than ISK 1,325,127 pays a tax of 46.29%. All employees who pay income tax must file tax returns to the Skatturinn-Revenue and Customs by March every year. 

13th Month Pay

It is not mandatory to pay employees a 13th-month bonus in Iceland. 

Work Permits and Visas in Iceland

To legally work in Iceland, foreign nationals must have a work permit and a residence permit. The process is different for citizens from the EEA and the EU. Icelandic work visas differ based on individual expertise, labor shortages, and student visas. 

For an employer to sponsor a foreign employee, they must register with the Directorate of Labor. The employer must initiate the process and present the worker with an employment contract. Foreign workers must apply for a residence permit in addition to the work visa. The visa application can take between 8 and 10 months when applying for a residence permit for the first time. For those applying for a renewal, the process is usually three months. 

Between work visas and residence permits, the immigration process in Iceland can be complex. It is best to reach out to Remote People for expert assistance when applying for work permits and seeking talent in Iceland. 

Hiring Contractors in Iceland

Income Tax Withholding

Independent contractors are responsible for managing their own wages and taxes in Iceland. Non-resident contractors are liable for income tax payments on services rendered in the country. Individuals without a permanent residence in Iceland are subject to a limited tax liability on their income of 15%. Independent contractors who are Icelandic residents are subject to unlimited tax liability. 

When hiring contractors, be sure to clarify their roles in the service agreement to avoid employee misclassification. 

VAT (Value-added Tax)

Individuals and businesses who deliver goods and services must pay VAT. In Iceland, the standard VAT rate is 24%. Qualifying goods and services are issued a reduced VAT rate of 11%. After each settlement period, all persons subject to tax liability must file an electronic statement to pay the outstanding VAT. 

Social Security Contributions

Independent contractors fall under the self-employment category and are therefore responsible for their own registration with the RSK for social security. 

Workers’ Compensation in Iceland

Iceland’s workers’ compensation is a mandatory system in which all resident employees are covered by insurance in the event of workplace accidents and occupational diseases. The system also covers employees who may sustain injuries while traveling to and from the workplace. The system offers employee benefits, including the settlement of medical expenses, disability benefits, and death benefits. Under tort law, employees can claim against an employer who is negligent in providing a safe workplace. 

Only Icelandic residents are automatically covered by subsidized health insurance (Sjúkratryggingar Íslands). 

Time Off and Leave in Iceland

Mandatory Leave Entitlements

Icelandic employees receive the following paid leave: 

Service PeriodPaid Leave Entitlement
First year2 days for every month worked
After 1 year24 days of paid leave
Every 2 yearsAround 48 days of accrued paid leave
Unused leaveCarried over to the next year

Sick Leave

Employees receive two days of sick leave for every month of employment; however, the longer the duration of employment with the same company, the more paid sick leave an employee receives. This means that employees who have completed one year of service are entitled to a month of paid sick leave. After three years, workers receive one month of paid sick leave and a month of sick leave paid at day rates. 

When it comes to sustaining injuries or becoming ill while on duty, employees receive a combination of sick leave and compensation. This includes a daily allowance for an inability to work due to injuries or illness and reimbursement for medical costs. 

Parental Leave

Each parent in Iceland has the right to six months of parental leave. Six weeks of parental leave can be transferred between parents. Parents must have completed at least six months of service to be eligible for parental leave. 

Maternity leave is usually six months, and paternity leave is six months. Once a child turns 24 months old, parental leave expires.

Terminations and Severance in Iceland

Termination Requirements

For permanent and fixed-term contracts, employees must receive written notice. An employer can terminate the contract based on mutual agreement, poor performance, contract expiration, or misconduct. Employers cannot discriminate against employees based on race, gender, religion, or background. 

The written notice for contract termination depends on the employee’s length of service. Employees who work for less than six months receive one week’s notice, while those who have worked for a year get two weeks’ notice. Employees who have worked for more than one year receive one month’s notice or more, depending on collective agreements. 

Severance Pay

Icelandic employers are not legally required to provide severance pay when terminating an employment contract. During the statutory notice period, employees must receive their regular salary and benefits. The terms for severance can be negotiated in a collective agreement. 

Compliance and Procedures 

When multiple employees are dismissed, the employer must report this matter to the regional employment office and consult with worker representatives. The employer must provide reasons for the collective dismissal to the employee representatives. 

Engage an Iceland Employer of Record, with Remote People

An EOR can provide companies with the crucial legal support they need whilst reducing their administrative burdens and operational costs. An EOR allows companies to expand into Iceland without setting up a legal entity, affording them a financial advantage. 

When choosing an EOR provider, it is crucial that companies prioritize the provider’s legal and industry expertise. The provider should be well-versed in Icelandic labor and taxation laws and be experienced in helping companies navigate the complexities of Iceland’s business environment.

To get the best deal on your Iceland EOR services, reach out to Remote People for a compliant, cost-effective hiring solution tailored to your business needs.

Frequently Asked Questions

There are several advantages to using an EOR in Iceland. Firstly, using an EOR is highly cost-effective as it eliminates the need to establish a legal entity in Iceland. Additionally, the services provided by the EOR ensure that costly tax and administrative penalties are avoided.

 

However, whilst EORs allow companies to scale up their business, they may limit their ability to scale their operations down according to their financial needs.

First, the company will need to choose a suitable, reliable, and efficient EOR provider. Remote People’s site provides a valuable comparison of different providers, allowing companies to assess the suitability of the provider based on their flexibility and cost. The employer will then need to contact the provider either by phone or email. The provider will then discuss optional arrangements with the employer to ensure that their operational needs are met and aligned. 

An EOR acts as a legal employer, therefore assuming all liability, whilst an Iceland PEO (Professional Employer Organization) acts as a co-employer, sharing the liability with the client company. PEOs, unlike EORs, also require companies to have an established legal entity in order to use their service.