MEMORANDUM

From: LEX Law Offices / Kristín Edwald partner / Erla S. Árnadóttir partner
Date: 24 March 2020

Subject: Measures undertaken by the Icelandic government in response to Covid – 19

This memorandum is intended to provide information on measures undertaken by the Icelandic government in response to disruption of businesses on account of the SARS-CoV2 virus. The memo will be updated as the occasion arises.

Status as on Tuesday 24 March 2020

The Icelandic government has announced further measures in response to COVID-19.

The measures are intended primarily to counteract unemployment and temporary loss of personal income through partial unemployment benefit (see below), access to third-pillar (private) pension savings, deferral of corporate tax payments, and operational loan facilities for companies. When the direct impact of the pandemic has begun to taper off, the authorities will give strong support to the revitalization of the economy with increased public investment intended to promote long-term GDP growth, tax cuts for labour done on-site at various workplaces, and a marketing campaign centring on Iceland as a tourist destination.

1) Deferred, split, reduced or cancelled payments will include:

• Employers can request authorisation to defer up to three payments of pay-as-you-earn (PAYE) tax and payroll tax due and payable from 1 April 2020 through 1 December 2020, upon fulfilment of certain requirements.
• Authorisation granted for the Minister to cancel or reduce companies’ income tax prepayments.
• The tax on overnight stays (bed-night tax) will be suspended temporarily from 1 April 2020 through 31 December 2021, and the due date for payments from January through March 2020 will be postponed until February 2022.
• Customs processing fees for ships and aircraft will be suspended temporarily, through year-end 2021.
• The bank tax reduction previously passed into law, which was to take effect in increments from 2021-2023, will be expedited and will take effect in full in 2021. This will give the banks extra scope to support households and businesses.
• Reimbursement of VAT on labour for work carried out at a residential construction site will temporarily be increased from 60% to 100%. The authorisation will also extend to vacation property and to design or supervision.

2) Treasury guaranteed operational loan facilities for companies.

The authorities will issue guarantees for up to 50% of new operating loans to companies fulfilling certain conditions.

The conditions for a Treasury guarantee will include the following:

• Guarantees apply only to new loans granted to companies that have suffered at least a 40% year-on-year loss of revenue as a result of the COVID-19 pandemic.
• Guaranteed loans may range up to a maximum of two times the company’s annual wage expense for the prior year.
• Loans shall be limited to companies whose wage expense accounted for at least 25% of their total expense in 2019.
• It will be permissible to restrict the use of the loans so that the proceeds can only be used, for certain payments within the operation.

Status as on Friday 20 March 2020

On 5 March 2020 the Government, the Confederation of Icelandic Enterprise (Icel. Samtök atvinnulífsins) („SA“) and the Icelandic Confederation of Labour (Icel. Alþýðusamband Íslands) („ASÍ“) signed a trilateral agreement on measures to ensure that individuals may comply with quarantine instructions from the health authorities without worry of their financial income (the “Agreement”). The Agreement provided for the following:

1. SA will request that employers pay salaries to those individuals who are quarantined as a result of following instructions of the health authorities.
2. ASÍ will request that their member organisations ensure that members of medical relief funds who are infected will receive undiminished payments from the fund when their sick-leave rights toward the employer have been exhausted.
3. The Government will amend the Health Insurance Act so that an employer that pays a salary to an employee who has or will be quarantined, may claim reimbursement from the Icelandic Health Insurance up to a specified threshold and subject to certain conditions, e.g. an employee not being able to perform its work from home. The extent and duration of such Government intervention was to be further set out with such work being proposed to be completed by 13 March 2020.

On 13 March 2020, two legislative bills were submitted to the Parliament to achieve the goals of the Agreement, on one hand a legislative bill amending Act No. 54/2006 on Unemployment Insurance (the “Unemployment Insurance Act”) and Act No. 88/2003 on the Wage Guarantee Fund (the “Wage Guarantee Fund Act”), and on the other hand a legislative bill on temporary payments for individuals who are quarantined as a result of instructions from the health authorities without showing any signs of being infected. These bills were enacted into law on 20 March 2020.

The legal status of employers, employees and self-employed persons, as affected by the new legislation, is further set out below.

A Act on amendments to the Unemployment Insurance Act

The purpose of the amending Act is to promote the maintenance of the employment relationship by employers with employees, while recognising that it may be necessary to reduce employee’s employment ratio to some extent.

1) Reduced employment ratio and payment of unemployment benefits
The employment ratio may be reduced in two ways. First, the employer may request of an employee that it agree to a reduction of its employment ratio, with a corresponding reduction in salary, without requiring a notice period. The acceptance of such an arrangement is at the employee’s discretion. Should the employee not accept, general provisions on notice periods will apply pursuant to the relevant collective bargaining agreement and the employee’s employment contract. In this case it would thus be necessary to terminate the full-time aspect of the employment contract with the notice period provided for in the collective bargaining agreement/employment contract.

An employee whose employment ratio is partially reduced is generally proportionately insured, cf. Article 17 of the Unemployment Insurance Act, and is entitled to unemployment benefits proportional to the reduction of its employment ratio. Under the rules applicable so far, should an employee voluntarily reduce its employment ratio or agree to an employer’s proposal to that effect, the employee would however not be entitled to such proportional benefits.

Under the previously applicable rules, unemployment benefits would be reduced on account of income from a part-time job, cf. Article 36 of the Unemployment Insurance Act. The new amending Act provides, however, provides that unemployment benefits may be paid in conjunction with a reduced employment ratio, without the fixed wages from the employer for the reduced employment ratio, reducing such benefits. This is subject to the requirement that the previous employment ratio was reduced by at 20% and the employee maintaining an employment ratio of at least 25%. An employer may not require a work contribution from an employee in excess of the reduced employment ratio. It is further a condition that the reduction of the employment ratio is a result of a temporary downswing in the employer’s operations. These benefits are available during the period of 15 March 2020 to 1 June 2020.

The Unemployment Insurance Act provides that, subject to the aforementioned requirements otherwise being satisfied, benefits may be paid even if an employee would otherwise not be considered insured under the Unemployment Insurance Act, e.g. on account of being a student or the requirements for a vesting period for benefits not being met. The benefits under the new scheme do not apply to fish processing workers who enjoy the benefits of guaranteed minimum salary.

The maximum amount of unemployment benefits shall be no more than the highest income-linked unemployment benefits adjusted proportionally for the reduced employment ratio. However, the sum of the salary paid by the employer and unemployment benefits may never exceed 90% of the average of the total income of the employee over the last three months prior to the reduction of the employment ratio. Further, the total amount of salary and unemployment benefits under the scheme may never amount to more than ISK 700,000 per month and shall not be less than ISK 400,000.

2) Decreases in salary

Should an employer seek to reduce an employee’s salary, this is subject to the general rules of collective bargaining agreements and Act No. 19/1979 on the Right of Workers to Termination Notice. The reduced portion of the salary must, therefore, be terminated in accordance with the notice period set out in the relevant collective bargaining agreement/employment contract. Should a company request of its employee’s that they accept a reduced salary without notice, each employee may reject such a proposal and require that the notice period apply. As set out above, employees may however agree to a reduction in salary without notice. The aforementioned amendment to the Unemployment Insurance Act does not have any effect in this regard.

B The Act on Temporary Payments for Wages to Persons Quarantined by Health Authorities without Being Infected

3) Wages in Quarantine
As referred to above, the Act on Temporary Payments for Wages of Persons Affected by Quarantine (“Wages in Quarantine Act”) was as enacted following the entry into of the Agreement. The Agreement provided that employers should pay wages to employees in quarantine and then seek reimbursement from the Icelandic Health Insurance. This arrangement was however deviated from in favour of the enactment of a separate temporary act providing for payment in such cases, the implementation of which would fall within the ambit of the Directorate of Labour. The Act applies to the period from 1 February 2020 to 30 April 2020.

Conditions for payments are set out in Article 5 of the Wages in Quarantine Act. It firstly provides for payments to employers who have paid salaries to employees who have been subject to quarantine, or employees having custody of a child under the age of 13 who is subject to quarantine, or a child under the age of 18 which receives services pursuant to Act No. 38/2018 on Services for Disabled Individuals requiring long-term Support and who is subject to quarantine. It is further a requirement that the employees have not been able to perform their work, in full or in part, from where they were quarantined, and that their absence from the workplace was not on account of other circumstances. As such, an employer is not entitled to reimbursement if an employee could perform its work from quarantine.

Second, according to Article 5, an employee is entitled to reimbursement for loss of salary in instances where the employee did not receive a paid salary, such as due to operational difficulties or loss of income of the employer. The Directorate of Labour may request confirmation from the employer that a salary was not paid and information on the reasons therefor.

The payment to the employer is based on the employee’s total salary during the calendar month or calendar months that the employee was in quarantine and the payment to the employee is based on its total salary for the preceding calendar month.

The Directorate of Labour will pay the statutory 4% employee contribution to the employee’s pension fund together with the 11.5% employer´s contribution. During any full calendar month payments may not exceed ISK 633,000 and the maximum payment for each day an employee is quarantined shall be ISK 21,100.

Third, the Wages in Quarantine Act provides that self-employed individuals may be entitled to reimbursement for loss of salary subject to the same conditions as apply to employers. Payments to these individuals are based on 80% of their average monthly income in the tax year 2019. Payments to these individuals are subject to the same maximum amounts as payment to employees.

The time an employee is in quarantine does not deplete the employee’s sick-leave rights. However, if the employee is ill from Covid-19, it exercises its sick-leave rights toward its employer. When the employee’s sick-leave rights toward the employer have been exhausted, the employee will be entitled to benefits from its union’s medical relief funds.