Iceland Employment Guide

Navigating Employee Termination in Iceland: A Guide for Global Employers

Terminating an employment relationship in Iceland requires careful adherence to a complex legal framework. Unlike in some jurisdictions, at-will employment does not exist beyond the probationary period, meaning employers must have valid, documented grounds for dismissal.

Legally Compliant Termination Pathways

Employers can legally end an employment contract through several avenues:

• Voluntary Resignation: Initiated by the employee.
• Mutual Agreement: A consensual separation negotiated between the employer and employee.
• Employer-Initiated Termination: This requires a substantiated reason, such as:
  • During the probationary period.
  • Objective grounds related to operational needs (e.g., redundancy).
  • Disciplinary dismissal for misconduct.
  • Termination due to sustained performance issues despite support and warnings.
• Contract Expiry: For fixed-term contracts.

Understanding Notice Periods

Notice periods are mandatory and increase with an employee's tenure. For instance, a company like SailGlobal must provide:

• 1 week's notice during the first 3 months (probation).
• 1 month's notice after the probationary period.
• 3 months' notice for employees with over 6 months of service.

Severance and Final Settlement

While Icelandic law does not mandate a standard severance pay, employers are legally obligated to settle all accrued benefits. A typical final payout includes compensation for unused vacation days, Christmas bonuses, and summer holiday allowances. Proper calculation is critical to avoid disputes.

Case Study: Avoiding Common Pitfalls

Consider a multinational tech firm that recently had to restructure its Reykjavik office. By proactively engaging local legal counsel to manage the redundancy process, including providing the correct 3-month notice and full settlement of accrued bonuses, the company ensured a smooth, compliant transition and maintained its positive employer reputation.