The Icelandic labour system is mainly based on collective agreements. Law stipulates some basic principles concerning the worker's rights and duties. Even though legislation must be considered the principal source of labour law in Iceland, case law can in some cases have equal value. The decisions of the Labour Court that passes judgments concerning violations and interpretation of collective agreements and their validity and the Supreme Court have played an important role in the development of labour law, especially where statute is deficient.
A distinction is made between the private and the public sector under Icelandic labour law albeit some legislation applies to both categories. A typical feature of the current labour law is that it lays down certain minimum rights, while making it possible for the trade unions and employers to agree on better solutions through collective bargaining.
There are two legislations which serve as the foundation of industrial relations under Icelandic law. Both of them contain the legal rules which regulate collective agreements and other collective rights. The Act on Trade Unions and Industrial Disputes, (TUI Act, 80/1938), applies in the private sector, except its third and fourth chapters on conciliation in industrial disputes and the labour Court regards both the private and public sectors. In cases where the state government or municipalities make agreements with unions in the private sector, the TUI Act applies. The Act on Collective Agreements of Public Servants, (CAPS Act, 94/1986), which to some extent corresponds with the TUI Act, applies otherwise in the public sector.
The collective agreements have had general applicability (erga omnes) according to the law since 1974. The Act on the Working Terms of Wage Earners in force (55/1980) stipulates that pay and other terms of employment concluded in collective agreements are minimum terms, applying to all workers in the respective branch within the geographical area covered by the agreement. Agreements between individual workers and employers specifying poorer employment terms than those provided for in the general collective agreements are invalid. It is therefore immaterial whether a worker or a particular employer is a member of one of the organisations involved in the relevant wage agreement.”
The freedom to provide services within the EEA entails the same challenges for the Icelandic labour market it does for the other Nordic countries. To tackle the problem, the Icelandic Confederation of Labour (ASI) and the Confederation of Icelandic Employers (SA) agreed, in March 2004, on a procedure in matters of disagreement concerning foreign workers. The organisations agreed that it is the joint task of the parties to see to those companies using foreign workers in their production or services pay wages and terms of employment that are in accordance with the collective agreements and the laws of Iceland. Furthermore, they agreed on a specific procedure to address this task, involving union representatives and a special Consultation Committee of ASI and SA for conflict resolution. Following a joint request and in consultation with ASI and SA, changes were made to law 55/1980 (law 145/2004) in order to secure the general application of the agreement. It has, therefore, the same general applicability as other agreements on wages and other terms.
The Constitution of the Republic of Iceland (l. 33/1944) protects the freedom of association (Article 74), referring specifically to Trade Unions, as well as requiring that everyone shall be equal before the law and enjoy human rights irrespective of sex, religion, opinion, national origin, race, colour, property, birth or other status.
Iceland is a member of the European Economic Area (EEA) which unites the EU Member States and the three EFTA States (Iceland, Liechtenstein and Norway) into one Single Market governed by the same basic rules in the area of free movement of goods, capital, services and persons. Iceland is a member of the UN and a party to all major international and European Human Rights conventions as well as being a member of various other international organizations such as the ILO, WTO and OECD.
 Heimild: https://www.government.is/topics/labour-market-and-employment/