Hiring in Iceland: A Comprehensive Guide for US Companies

Iceland stands out in the global talent market as a progressive, highly educated, and digitally connected society. Its workforce is known for strong technical skills, high English proficiency, and adaptability. The country’s robust labor laws, transparent business practices, and stable economy make it an attractive destination for international hiring. 

For foreign companies, hiring in Iceland offers access to a skilled talent pool, a supportive regulatory framework, and a gateway to the broader Nordic and European markets. 

The Icelandic business environment is characterized by efficiency, innovation, and a strong emphasis on employee well-being, making it ideal for companies seeking reliable and motivated talent.

How to Hire Employees in Iceland

Assess Your Hiring Needs

Start by clarifying your hiring objectives in Iceland. Decide whether you require full-time employees for ongoing operations or project-based support for specific initiatives. 

Consider how local compliance requirements, such as employment contracts, payroll, and statutory benefits, will impact your hiring strategy. Evaluate your need for rapid onboarding versus the desire for long-term control over HR processes. 

If speed and simplicity are priorities, leveraging a global partner may be preferable. For those seeking more direct oversight, establishing a local presence might be worth the investment.

Hiring Options in Iceland

You have two primary options for hiring in Iceland:

• Set Up a Legal Entity: Establish a local subsidiary or branch, register with Icelandic authorities, and manage all HR, payroll, and compliance requirements directly. This approach provides full control but requires significant time, resources, and ongoing legal management.
• Partner with an Employer of Record (EOR): Engage an EOR to act as the legal employer on your behalf. The EOR handles employment contracts, payroll, benefits, and compliance, allowing you to hire quickly and compliantly without setting up a local entity.

For a deeper dive into these models, check out Employer of Record: Complete Guide for Global Employers and Top 20 Countries Where You Definitely Need an EOR Service.

EOR vs. Legal Entity: Side-by-Side Comparison

Feature	Employer of Record (EOR)	Legal Entity Setup
Setup Time	Days to weeks	Months
Upfront Cost	Low (service fee)	High (legal, registration, admin)
Compliance Management	EOR handles all local compliance	Your responsibility
Payroll & Benefits	Managed by EOR	Managed by your HR/payroll team
Onboarding Speed	Fast (2 days typical)	Slow (due to entity setup)
Long-term Control	Less direct, but flexible	Full control
Best for	Testing market, quick scaling, remote teams	Large teams, long-term investment

Ready to hire in Iceland without the hassle? Discover how Tarmack’s EOR solution can help you onboard talent quickly and compliantly.

Understanding Worker Classification

Employees vs. Contractors in Iceland

Correct worker classification is essential in Iceland. Here’s how the two main categories differ:

Aspect	Employee	Contractor
Legal Status	Hired under an employment contract	Engaged via service agreement
Control	Employer directs work, hours, and location	Contractor controls how and when work is done
Payroll	Paid via employer payroll, with taxes withheld	Invoices for services, responsible for own taxes
Benefits	Entitled to statutory benefits (leave, pension, etc.)	Not entitled to employee benefits
Termination	Protected by labor laws and notice periods	Governed by contract terms

Legal Implications and Risks of Misclassification

Misclassifying employees as contractors can result in significant legal and financial penalties in Iceland. 

Authorities may reclassify contractors as employees if the working relationship meets the criteria of employment, such as employer control over work and integration into the company. This can lead to back payment of taxes, social security contributions, statutory benefits, and fines. 

To avoid these risks, ensure your classification aligns with Icelandic law and collective bargaining agreements. For more, see Freelancers, Independent Contractors, Consultants: Exploring Opportunities & Challenges.

Hiring Costs and Payroll

Hiring Costs Overview

Hiring in Iceland involves more than just gross salary. Employers must budget for mandatory contributions, including:

• Provident Fund: 11.5% of salary
• Pension Fund: 2.0%
• Insurance Fund: 6.92%
• Employee Sickness Fund: 1.0%
• Employee Training Fund: 0.3%
• Trade Union Benefits: 0.25%
• Recreational Fund: 0.1%

The total employer cost is approximately 22.07% of the employee’s salary. This excludes optional benefits like private healthcare or global life insurance.

For a detailed breakdown, read Understanding Total Cost of Employees: Calculation & Management Factors.

Payroll Setup Steps

Setting up payroll in Iceland requires:

• Registering your business or EOR as an employer with local authorities.
• Collecting employee tax and social security information.
• Setting up monthly payroll cycles (the standard in Iceland).
• Calculating and withholding appropriate taxes and contributions.
• Issuing payslips and remitting payments to employees and authorities.

EORs automate much of this process, reducing administrative burden and risk.

Income Tax Rates

Iceland uses progressive income tax rates:

• ISK 0 – 446,136: 31.48%
• ISK 446,137 – 1,252,501: 37.98%
• Above ISK 1,252,501: 46.28%

Additional factors, such as household status and number of children, may affect the final rate. Employers are responsible for withholding and remitting taxes.

Payment Methods

Common payment methods include:

• Direct Deposit: Most common, secure, and efficient.
• Bank Transfers: Used for both employees and contractors.
• EOR Payroll: If using an EOR, payments are managed and distributed through their platform, ensuring compliance and timely delivery.

For more on international payroll, under How to Pay International Employees.

Using Global Payroll Services

Global payroll providers, such as Tarmack, streamline payroll across multiple countries, ensuring compliance with local tax and labor laws. They handle:

• Multi-currency payments
• Tax withholding and reporting
• Benefits administration
• Compliance monitoring

Learn more at How Tarmack Streamlines Global Payroll and Compliance for Enterprise Growth.

How to Properly Hire and Pay Contractors

To hire contractors in Iceland:

• Draft a clear, project-based service agreement.
• Ensure the contractor is registered as self-employed.
• Pay via bank transfer or international payment platform, based on invoice.
• Do not provide employee benefits or direct supervision.
• Keep records of all payments and agreements for compliance.

Here are the Best Ways to Pay International Independent Contractors: Challenges and Solutions.

Looking to simplify payroll and compliance in Iceland? See how Tarmack’s global payroll platform can help you reduce risk and administrative effort.

Compliance Risks

Incorrect Payroll Contributions

Failing to calculate and remit the correct social security and pension contributions can result in penalties and legal action. Icelandic authorities closely monitor employer compliance, and errors can be costly. 

Always verify contribution rates and deadlines, or use a trusted EOR or payroll provider to manage these obligations.

Permanent Establishment Risk

Hiring employees directly in Iceland without a legal entity can trigger permanent establishment (PE) risk, exposing your company to local corporate tax and regulatory requirements. Using an EOR mitigates this risk, as the EOR acts as the legal employer.

For a deeper understanding, read about Compliance Challenges in Establishing an Entity Overseas: Tips to Overcome.

Statutory Benefits

Employers must provide statutory benefits, including:

• Pension and provident fund contributions
• Sickness and training funds
• Trade union benefits (including summer house and recreational funds)
• Access to social security

Failure to provide these can result in fines and employee claims.

Misclassification Risks

Misclassifying employees as contractors to avoid taxes or benefits is a major compliance risk. Icelandic authorities may reclassify workers and impose back payments, penalties, and even criminal charges for intentional misclassification. 

Learn about Employment Compliance and Its Importance.

Provincial/Regional Law Variances

Iceland is a unitary state, so labor laws are consistent nationwide. However, collective bargaining agreements (CBAs) may vary by sector or union, affecting minimum wage, benefits, and working conditions. Always check the relevant CBA for your industry.

Overview of Intellectual Property Rights for Employers

Employers in Iceland should ensure employment contracts clearly address ownership of intellectual property (IP) created during employment. Common IP rights include:

• Copyright (for written, artistic, or software works)
• Patent rights (for inventions)
• Trademark rights (for branding)
• Trade secrets (confidential business information)

Explicit clauses in contracts and NDAs help protect company IP. 

For more details, check out Managing Intellectual Property (IP) Through EOR: Key Considerations for Businesses.

Onboarding Process

Before Their First Day

• Collect personal information, tax ID, and bank details.
• Prepare a written employment contract (mandatory for employment over one month and 8+ hours/week).
• Register the employee with local authorities for social security and tax purposes.
• Provide pre-boarding materials and set expectations for the first day.

On Day 1

• Review the employment contract, company policies, and code of conduct.
• Provide access to necessary systems, equipment, and security credentials.
• Introduce the employee to their team and assign a mentor or onboarding buddy.
• Ensure compliance with health and safety requirements.

For more onboarding tips, read Top Eight Best Practices for Onboarding International Employees: How EOR Can Help.

During Their First 90 Days

• Monitor progress through regular check-ins and feedback sessions.
• Confirm completion of mandatory training (including health, safety, and data protection).
• Evaluate performance at the end of the probation period (up to 3 months).
• Address any concerns and provide support for integration.

Offer Letter Essentials

A compliant offer letter in Iceland should include:

• Job title and description
• Start date and probation period
• Salary and benefits (including pension and other contributions)
• Working hours and location
• Notice period and termination terms
• Reference to applicable CBA or union agreement

NDAs and Confidentiality

Non-disclosure agreements (NDAs) are recommended to protect sensitive business information. Include confidentiality clauses in employment contracts, specifying the handling of trade secrets and intellectual property.

Running Background Checks

Permissible background checks in Iceland include:

• Education and qualification verification
• Criminal record checks (with applicant consent)
• Credit checks (if relevant to the role)
• Medical screening (for safety-critical positions)

Always obtain written consent and ensure checks are relevant to the job.

Want to ensure a seamless onboarding experience in Iceland? Learn how Tarmack’s onboarding solutions can help you stay compliant and efficient.

Remote Employee Management

Managing remote employees in Iceland requires clear processes and robust digital infrastructure.

• Computer Access: Provide secure laptops and ensure devices are compliant with company IT policies. Use remote device management tools for updates and security.
• App Access: Set up secure access to necessary apps and platforms using single sign-on (SSO) and two-factor authentication (2FA). Limit access based on role.
• IP Protection: Include clear IP ownership clauses in contracts. Use NDAs and monitor data access. Educate employees about confidentiality and data security.
• Communication: Schedule regular check-ins and team meetings. Use collaboration tools to keep remote teams engaged.
• Performance Management: Set clear goals and track progress with regular feedback.

Learn How to Manage Employees Remotely and Globally and about Building Organizational Culture in Remote Teams.

Labor Law Compliance

Key Working Condition Requirements

• Standard Hours: 8 hours per day, 40 hours per week (Monday to Friday).
• Overtime: Paid at 1.5x regular wage; not mandatory for managerial roles.
• Rest Breaks: 11 consecutive hours between workdays; 30-minute break if working more than 6 hours.
• Annual Leave: Mandatory, with specifics determined by CBA.
• Probation: Up to 3 months.

Working Conditions by Employment Type

• Full-Time Employees: Covered by CBAs, entitled to all statutory benefits.
• Part-Time/Project-Based: Rights and benefits pro-rated; must still comply with statutory minimums.
• Contractors: Not entitled to employee benefits; governed by service agreements.

No At-Will Employment

Iceland does not recognize at-will employment. Terminations require just cause and adherence to notice periods.

Trade Unions and Collective Bargaining

Most employees are covered by trade unions, which negotiate CBAs setting minimum wage, benefits, and working conditions. Employers must comply with the relevant CBA for their sector.

Read about Employment Compliance and Its Importance.

Termination Guidelines

Acceptable Termination Reasons

Terminations in Iceland must be justified and in line with labor law and CBAs. Acceptable reasons include:

• Redundancy due to business restructuring
• Performance issues (after documented warnings)
• Misconduct or breach of contract
• End of fixed-term contract

Employers must document the reason and follow due process, including providing written notice and opportunity for the employee to respond.

Notice Periods and Legal Protections

Notice periods are typically set by CBAs and employment contracts, often ranging from 1 to 3 months depending on tenure and role. During the notice period, employees are entitled to full pay and benefits. Unlawful termination can result in reinstatement orders or compensation. Special protections apply for pregnant employees, those on parental leave, and union representatives.

Check out the Suggested Script for Terminating an Employee Professionally & Respectfully.

Benefits of Hiring in Iceland

• Highly Skilled Talent Pool: High education levels, strong English proficiency, and technical expertise.
• Efficient Business Environment: Transparent regulations and streamlined processes.
• Cost Efficiency: Competitive employer costs compared to other Nordic countries.
• Time Zone Advantage: Overlaps with both North America and Europe for global collaboration.
• Robust Digital Infrastructure: Reliable internet and digital tools for remote work.
• Strong Worker Protections: Reduces risk of disputes and enhances employer reputation.
• Access to Nordic and EU Markets: Strategic location for regional expansion.

Hire Top Talent in Iceland Hassle-Free

Hiring in Iceland offers foreign companies a unique blend of skilled talent, business-friendly regulations, and strong employee protections. By understanding local hiring options, compliance requirements, and best practices for onboarding and management, companies can build a successful presence in this dynamic market. 

Leveraging an Employer of Record or global payroll partner can streamline the process, reduce risks, and enable rapid scaling. With the right approach, Iceland can be a strategic hub for your international growth.

Ready to build your team in Iceland? Contact Tarmack to get started with compliant, hassle-free hiring today.