Picture a talent market that most global companies overlook. It sits between two continents with a population smaller than most mid-sized cities, yet this Nordic island has quietly built one of the most educated, English-fluent workforces in the world(it’s the green one, not the one with snow).
Iceland’s tech sector now contributes 8.5% to the country’s GDP as of 2025. That might sound modest until you consider the quality of talent concentrated there. Nearly every Icelander you meet will speak fluent English. The education system produces graduates comfortable with remote collaboration and digital tools. This is a workforce that grew up balancing global connectivity with local culture.
For distributed companies, hiring in Iceland presents a unique opportunity. The time zone bridges Europe and North America. The culture already embraces flexible work arrangements and outcomes over hours logged. You get access to specialized talent in AI, cybersecurity, and cloud computing without the language barriers or cultural friction that complicate other international hires. Companies expanding into new markets often miss Iceland precisely because of its size. But small can be strategic when the talent density is this high.
The Icelandic labor market
Iceland has one of the highest labor participation rates in Europe. As of August 2025, the employment rate stands at 77.3%. What makes this interesting for employers is not just the numbers. It’s the structure underneath them.
The country pioneered one of the world’s largest four-day workweek trials between 2015 and 2019. Approximately 2,500 workers participated without any loss of pay. The results shifted how the entire nation thinks about work. By 2022, about half of Iceland’s workforce had moved to shorter working hours and around 78% now report satisfaction with their working time. Productivity either stayed the same or improved across most workplaces.
For tech companies, the labor market presents specific opportunities and challenges. The sector employs over 12,000 professionals and contributes roughly 8.5% to the national GDP. Demand outpaces supply in AI, cloud computing, and cybersecurity roles. Iceland is projected to face a shortage of over 1,000 tech professionals by the end of 2025. This creates competition for talent but also signals a growing ecosystem that attracts ambitious professionals who want to work on cutting-edge problems.
The remote work infrastructure was already strong before the pandemic and has only strengthened since. Workers here understand distributed collaboration because the small population means many professionals already work with international clients or partners. The culture values outcomes over hours logged. You’re hiring into a market where flexibility is a baseline expectation and autonomy is built into how people approach their jobs.
How to hire employees in Iceland
When you decide to hire in Iceland, you face a choice that every expanding company confronts. You can establish your own legal presence or partner with someone who already has one.
Setting up a local entity
This is the traditional route. You register a business entity with Iceland’s Commercial Register, obtain the necessary trade licenses, and set up local payroll systems. The upside is full control over the entire employment relationship and infrastructure.
The downside is time and complexity. Setting up an entity can take several months and requires navigating Iceland’s specific regulations around collective bargaining agreements, which cover most sectors. This approach makes sense when you’re planning significant long-term operations or hiring a larger team.
Hiring through an employer of record (EOR)
An EOR acts as the legal employer on paper while you manage the day-to-day work and performance of your team members. The EOR handles employment contracts, payroll in Icelandic króna, tax withholding, social security registration, and compliance with local labor laws.
This model lets you hire quickly without establishing your own entity. You can have employees working in Iceland within days instead of months. EOR pricing typically ranges from €500 to €1,200 per employee per month. For distributed tech companies testing the Icelandic market or hiring specialized talent without committing to a full office setup, an EOR removes most of the friction.
Employment contracts in Iceland
Employment contracts in Iceland must be documented in writing. Verbal agreements can technically be binding, but written contracts protect both parties and ensure compliance with Icelandic labor law. You need to get this document signed within two months of the employee starting work.
The contract must include specific mandatory elements, including:
- Identities of both parties
- Job title and description
- Start date and working hours
- Workplace location
- Salary details and holiday entitlement
- Notice periods
- References to any applicable collective agreements
Most Icelandic employment contracts are indefinite-term agreements without a specified end date. Fixed-term contracts are allowed but only when justified by objective reasons like project work or temporary replacements.
Probationary periods typically last a couple of months, with three months being the cap. During probation, shorter notice periods apply. This gives both sides time to assess fit without long-term commitment. Repeated use of fixed-term contracts for the same role without clear justification can result in the contract being reclassified as indefinite.
Icelandic working hours, holidays, and leave
The standard workweek in Iceland is 40 hours spread across five days. But the four-day workweek movement has fundamentally shifted expectations. Following the trials in 2019, 51% of Iceland’s workforce reduced its working hours without a reduction in pay. Today, reports indicate that number is as high as 90% of the workforce.
Employees who work beyond standard hours receive overtime compensation at 1.5 times their regular wage. Workers are entitled to at least 11 consecutive hours of rest between workdays and a 30-minute break when working shifts over six hours.
Iceland’s public holidays are generous and widely observed. The country celebrates around 16 national holidays, including major ones like New Year’s Day, Easter, Icelandic Independence Day (June 17), and Christmas. Christmas Eve and New Year’s Eve afternoons are also holidays. These holidays often come with premium pay rates for overtime. In addition to public holidays, Icelandic workers benefit from a solid vacation policy, typically 4 to 5 weeks of annual leave.
Employees also have access to parental leave and special leave for illness or family emergencies. The labor law and collective agreements ensure workers have ample time off with protections around how such leave is managed, supporting wellbeing as part of everyday working life. The culture here values work-life balance as a practical necessity rather than a corporate perk.
Employee benefits and social contributions
Iceland operates a comprehensive social security system funded through employer and employee contributions. Here’s what you need to account for:
- Pension fund contributions are mandatory, with employers typically contributing around 11.5% and employees contributing 4% of gross salary.
- Income tax includes both national and municipal taxes, with rates varying based on income levels.
- Social security contributions cover healthcare, unemployment insurance, and other benefits.
- Employers must also contribute to mandatory insurance schemes.
Collective bargaining agreements often dictate additional benefits beyond legal minimums. These agreements cover most sectors and influence everything from minimum wages to supplementary pension contributions. Even if you hire through an EOR, understanding these contribution requirements helps you budget accurately for total compensation costs.
Payroll and taxation in Iceland
Payroll in Iceland must be processed in Icelandic króna (ISK) and comply with local tax withholding requirements. Employers are responsible for deducting income tax and social security contributions at source before paying employees. The tax system includes both national income tax and municipal tax components.
Employees receive a personal tax credit, which is a tax deduction that individuals aged 16 and over can use to reduce the tax withheld from their salaries by their employer. In 2025, the maximum monthly tax credit is ISK 68,691 (US$564).
Tax rates are progressive, with higher earners paying increased percentages. Your payroll system needs to track pension contributions, union dues (if applicable under collective agreements), and other statutory deductions. Payment frequency is typically monthly, though some collective agreements may specify different schedules.
Employee vs. contractor classification
Hiring in Iceland means getting classification right. The line between “employee” and “contractor” is more than just a contract label; it shapes how you pay, tax, and manage talent. Employees work under your control, follow your schedule, and get benefits like paid leave and a pension. Contractors work independently, manage their own taxes, and typically juggle multiple clients.
Misclassifying an employee as a contractor carries real risk. Icelandic authorities look past titles to how work is actually structured. If a contractor looks, acts, and feels like an employee, you could be on the hook for back taxes and penalties. Here are some red flags that might signal misclassification:
- You set their hours or supervise daily tasks
- The worker doesn’t invoice you or takes no business risk
- They receive employee-type benefits like sick pay or paid vacation
- They’re using your tools, software, or office space
If in doubt, always check with local experts. Fixing a classification mistake is harder (and more expensive) than getting it right upfront.
Termination and severance in Iceland
Ending an employment relationship in Iceland requires care. Notice periods are standard: the longer someone’s tenure, the more notice they get. Employers and employees can both end contracts, but terminations must follow the rules set in labor law and collective agreements.
Severance pay isn’t automatic, but it can come into play if the termination isn’t justified or if the employment contract (or collective agreement) provides for it. Dismissal for cause (like serious misconduct) requires documentation and process.
Unfair termination can lead to claims for compensation, and Icelandic courts have a reputation for siding with wronged employees. If you follow the process and maintain clear communication, most exits go smoothly.
Work permits and immigration
If your dream hire is based outside the country or the EEA, Icelandic work permits and immigration rules come into play quickly. Iceland welcomes global talent, but the application process is precise. Non-EEA workers need a valid job offer first, and the employer must often prove the role couldn’t be filled locally. Applications typically require a written employment contract, proof of qualifications, and, in some cases, documentation of housing arrangements.
The government offers different permit types, including specialist permits for highly qualified roles and temporary permits for short-term needs. Processing times can run several weeks, so planning ahead matters. Once granted, the permit spells out the job and employer. Changes mean restarting the application. With the right paperwork and patience, bringing in international talent is absolutely doable in Iceland.
FAQs
Hiring in Iceland combines Nordic efficiency with a deep respect for work-life balance. Here are quick answers to what employers ask most when expanding into the Icelandic market.
What is the work culture in Iceland?
Icelandic work culture values equality, collaboration, and autonomy. Hierarchies are flat, managers are approachable, and decisions often come through open discussion. After the four-day workweek trials, flexibility and well-being have become central to how Icelanders define productivity. Expect employees who work smart, not endlessly, and who value employers that trust them to get results.
What is a good salary in Iceland?
Salaries vary by sector, but well-paid professionals typically earn between ISK 700,000 and 1,000,000 per month, or around US$5751 to $8216. Iceland Review reports an average full-time salary of ISK 984,000 in 2024, while Statistics Iceland found the average regular monthly earnings to be ISK 758,000. Tech roles often sit at the upper end, with developers and engineers commanding competitive wages aligned with other advanced European markets. Iceland’s cost of living is high, so compensation packages commonly include strong benefits and pension contributions.
Can I hire in Iceland without a local business entity?
Yes, through an employer of record like Pebl, you can legally hire, onboard, and pay employees in Iceland without setting up a local entity. The EOR manages local compliance, payroll, and benefits while you handle day-to-day management. It’s a fast, compliant way to expand teams in emerging markets like Iceland.
What is the minimum wage in Iceland?
Iceland does not have a single, government-set national minimum wage. Instead, wages are governed by sector-specific collective bargaining agreements negotiated by unions and employer associations. These agreements usually guarantee minimum monthly pay between ISK 368,000 and 445,000 (€2,400–€2,900), depending on the role and experience level.
Hire in Iceland with Pebl
So you’re sold on hiring in Iceland. You could start by tracking down local experts and begin the long, costly process of setting up a local entity. You could be ready to hire within a few months.
Or, you could go global without the growing pains with Pebl.
Our global Employer of Record services let you onboard talent quickly in 185+ countries worldwide, including Iceland without the need to open a local entity. You don’t have to worry about running local payroll in Icelandic króna and staying compliant with local tax and labor laws—we take care of it all.
From employment contracts to benefits administration, we handle the details so your team can focus on what actually matters. Whether you’re hiring your first Iceland-based developer or scaling an entire Nordic team, Pebl gives you a smooth, compliant way to make it happen. Reach out to learn more.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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