Legislation has been passed in Iceland covering various aspects of Labour Law and laying down the basic principles governing workers' rights and obligations. Generally, the law states minimum rights, and agreements made on the basis of more restricted rights are therefore void.

The Icelandic labour system is mainly based on collective agreements. Law stipulates some basic principles concerning the worker's rights and duties, whereas there exists no complete legislation regarding labour and social affairs in Iceland. Icelandic law contains provisions on the minimum rights that are ensured for all workers. A typical feature of the current labour law is that it lays down certain minimum rights, while making it possible for the labour unions and employers to agree on better solutions through collective bargaining.

The vast majority of wage earners in Iceland (approximately 85%) are unionised. The minimum pay and terms for the workers in Iceland are determined in collective agreements between the trade unions and employers. The agreements cover all workers in the relevant occupations in the geographical area to which each agreements applies. The agreements, however, apply not only to the members of the unions, cf. Article 1 of Act no. 55/1980 on the Wage Earners' Terms of Service and Obligatory Pension Rights, as the wages and the other terms for all the wage earners in the relevant occupations in the area covered by the agreements. Agreements between individual workers and employers specifying poorer employment terms than those provided for in the general collective agreements are invalid under the act. 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 act from 1938 on labour unions and labour disputes marked the beginning of a new era in Icelandic labour rights. In the act the rights by the labour unions on the labour market to enter into wage agreements was ensured and rules were set regarding strikes, as well as the act stipulating the establishment of the Labour Court, which is a special court addressing labour affairs. The collective agreements of individual labour unions have frequently addressed various issues of labour rights, followed by legislation. In recent years, the directives by the EC, that have become a part of the EEA Agreement, have generated much development in Icelandic labour affairs and the directives have eithver been included in laws or in collective agreements.

Civil servants have a special position on the Icelandic labour market. A special law, Act no. 70/1996, applies to their rights and duties. Additionally, Act no. 94/1986 addresses the wage agreements of civil servants. There are also various special rules that apply to certain groups of employees on the Icelandic labour market, for example, fishermen and sailors, industrial apprentices, agricultural workers and bank employees.

Implementation of general labour legislation is supervised by the Ministry of Social Affairs. Two bodies under the ministry, the Occupational Safety and Health Administration and the Directorate of Labour, deal with individual aspects of implementation.