✍️ Is the non-compete clause in my employment contract binding?

With conditions

Quick answer

Conditional — a non-compete clause binds only so far as it is reasonable, and sometimes falls away entirely. Under Article 37 of Act no. 7/1936 (the Contracts Act), a non-compete clause in an employment contract is unenforceable if it goes further than necessary to protect the business against competition, or if it unreasonably restricts your freedom to work. The myth that keeps people from changing jobs: that a signed clause always binds you, however broad it is. That is wrong — the courts assess whether the clause is reasonably limited in time, area and field of work, and broad or vague bans are struck down. More important still: a non-compete clause does not apply if you are dismissed without having given cause for it yourself. There is no fixed maximum duration in the law; validity turns on an overall assessment of how much of a key employee you were, whether you had direct contact with customers and how quickly your knowledge dates.

📋 The rules

A non-compete clause is unenforceable if it goes further than necessary to protect against competition (Article 37 of Act no. 7/1936).
It is also unenforceable if it unreasonably restricts your freedom to pursue work.
The clause does not apply if you are dismissed without having given sufficient cause for the dismissal yourself.
There is no fixed maximum in the law on duration; validity turns on an overall assessment of time, area and field of work.
The assessment weighs, among other things, whether you were a key employee, contact with customers, confidentiality duties and how quickly your knowledge dates.

🔓 Exceptions

If you are dismissed without having given cause, the non-compete clause falls away, even if it was otherwise valid.
Narrow, well-defined clauses — a short time, a limited area, specific roles — pass the test rather than broad bans.
A duty of confidentiality about trade secrets can stand regardless of a non-compete clause; disclosing business secrets is prohibited in any case.

⚠️ Penalties & fines

If you breach a valid non-compete clause, the former employer can claim damages for the loss caused, and there are cases where Icelandic courts have awarded companies damages for such breaches by employees. Some clauses provide for a contractual penalty on breach, but its amount can be reduced if it is excessive. The employer can also seek an injunction to stop activity that breaches the clause while the matter is in dispute. On the other hand, the hidden cost for employees is more often self-imposed restraint: people stay stuck in a job or turn down offers out of fear of a clause that would not stand up in court anyway. Since the clause falls away on dismissal without cause, and broad bans are struck down, it pays to have a lawyer or trade union assess the clause before it drives career decisions. Giving in to an invalid clause can cost the wages a better job would have paid.

📎 Official sources

Last verified: 2026-07-12

❓ Frequently asked

Is a non-compete clause always binding if I signed it?

No, signing alone does not make the clause binding if it goes further than necessary or unreasonably restricts your freedom to work. The courts can strike down broad or vague clauses under Article 37 of the Contracts Act, so a signature is not the same as a valid ban.

Does the clause apply if I am dismissed?

Not if you are dismissed without having given sufficient cause for the dismissal yourself, because the non-compete clause then falls away. If you resign or are dismissed for your own fault, the clause can retain its validity so far as it is reasonable.

How long can a non-compete ban last?

There is no fixed maximum in the law; the duration turns on an overall assessment of what is reasonable in time, area and for specific roles. A short, well-defined ban stands rather than a multi-year ban covering the whole industry, because such broad restraints count as unreasonable.

What can a former employer do if I breach a valid clause?

They can claim damages for the loss, apply a contractual penalty if it is in the contract and seek an injunction to stop the activity while the matter is disputed. The amount of a contractual penalty can, however, be reduced if it is excessive, and everything depends on whether the clause itself is valid.

What should I do if a new job clashes with the clause?

The wisest step is to have a lawyer or trade union assess the clause before you decide, because many clauses do not stand up in court. That way you avoid turning down a better job over a ban that would not hold anyway, or breaching a clause that really does apply.

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