<PAGE>
 
                                                                   Exhibit 10.26
                              EMPLOYMENT AGREEMENT
                              --------------------


     AGREEMENT made as of the 10th day of September, 1998, by and among L.S.
Wholesale, Inc., a Massachusetts corporation with its main office in St. Thomas,
U.S.V.I. (the "Employer"), Little Switzerland, Inc., a Delaware corporation with
its main office in St. Thomas, U.S.V.I. ("Little Switzerland"), and David Nace
(the "Executive").

                                   WITNESSETH

     WHEREAS, the Executive possesses certain unique skills, talents and
judgment as well as the experience to provide the direction and leadership
required by the Employer; and

     WHEREAS, the Employer and Executive desire to provide for the Executive's
employment by the Employer.

     NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants contained herein, the Employer and the Executive mutually agree as
follows:

     1.   Employment.  The Employer agrees to employ the Executive and the
          ----------                                                      
Executive agrees to be employed by the Employer on the terms and conditions
hereinafter set forth.

     2.   Effective Date and Term.  The commencement date (the "Commencement
          -----------------------                                           
Date") of this Agreement shall be September 10, 1998.  Subject to the provisions
of Section 5 hereof, the term (the "Term") of the Executive's employment
hereunder shall be for two (2) years from the Commencement Date.  The last day
of such Term shall be September 9, 2000 and is herein sometimes referred to as
the "Expiration Date."

     3.   Compensation and Benefits.  The compensation and benefits payable to
          -------------------------                                           
the Executive under this Agreement shall be as follows:

          a.  Salary.  For all services rendered by the Executive under this
              ------                                                        
     Agreement, the Employer shall pay the Executive a total salary as follows:

                (1) Base Salary.  For each twelve (12) month period of the Term,
                    -----------                                                 
          the Employer shall pay the Executive a base salary at an annual rate
          (the "Base Salary") equal to Two Hundred Thousand Dollars ($200,000).

                (2) Bonus.  During the Term and as further set forth below, for
                    -----                                                      
          each fiscal year during which the Executive is employed by the
          Employer pursuant to this Agreement, in the event that Little
          Switzerland shall achieve certain performance criteria (the
          "Performance Criteria"), which will be based on the business plan of
          Little Switzerland, the Employer shall pay to the Executive a bonus
          (the "Annual Bonus") in an amount of up to one-quarter (25%) of the
          Base Salary earned for that fiscal year, which shall be prorated for
          periods shorter than a full fiscal.

               The applicable Performance Criteria for the 1999 fiscal year of
          Little Switzerland shall be mutually agreed upon by the Employer and
          the Executive and the applicable Performance Criteria for the 2000
          fiscal year of Little Switzerland shall be established by the
          Compensation Committee of Little Switzerland prior to the beginning of
          such fiscal
<PAGE>
 
          year. For any fiscal year, the determination of whether the
          Performance Criteria have been met and whether any Annual Bonus shall
          be paid shall be made by the Compensation Committee of Little
          Switzerland.

          The Executive's Base Salary shall be payable in periodic installments
     in accordance with the Employer's usual practice for payment of
     compensation to its senior executives.  The Annual Bonus, if any, shall be
     payable within ten (10) calendar days after the date on which Little
     Switzerland determines from its business plan, financial reports and other
     relevant information the extent to which, if any, the Performance Criteria
     have been achieved and in any event not more than ninety (90) days after
     the end of the Employer's fiscal year.  Notwithstanding the foregoing, the
     Annual Bonus shall be prorated for any period of employment shorter than a
     full fiscal year.

          b.  Stock Bonus Plan.  On the Commencement Date, the Executive will be
              ----------------                                                  
     awarded an option (the "Option") to purchase 75,000 shares of common stock,
     par value $.01 per share, of Little Switzerland (the "Common Stock") having
     an exercise price equal to one hundred percent (100%) of the fair market
     value of a share of Common Stock on the Commencement Date, pursuant to
     Little Switzerland's 1991 Stock Option Plan.  If at least eighty percent
     (80%) of the Performance Criteria have been met, as determined in the sole
     and absolute discretion of the Compensation Committee of Little
     Switzerland, for the 1999 fiscal year of Little Switzerland, then on the
     first anniversary date of the Commencement Date, the Executive will be
     awarded an additional option to purchase 75,000 shares of Common Stock on
     the same terms and conditions as the Option.  All options awarded to the
     Executive shall qualify as an "incentive stock option" under (S)422A of the
     Internal Revenue Code of 1986, as amended.

          c.  Living Expenses.  The Executive shall be entitled to reimbursement
              ---------------                                                   
     for reasonable expenses actually incurred for the purpose of maintaining a
     temporary place of residence in St. Thomas, U.S.V.I. (the "Living Expense")
     for a period not to exceed thirty (30) days from the Commencement Date.
     The Executive shall account promptly for the expenses set forth above to
     the Employer in the manner reasonably prescribed from time to time by the
     Employer and in compliance with the Employer's policy.

          d.  Relocation and Out-of-Pocket Expenses.  On the Commencement Date,
              -------------------------------------                            
     the Employer shall pay the Executive an aggregate amount equal to Fifty
     Thousand Dollars ($50,000) to cover moving, relocation and out-of-pocket
     expenses incurred by the Executive in moving to St. Thomas, U.S.V.I.

          e.  Regular Benefits.  The Executive shall be entitled to vacation
              ----------------                                              
     time in an amount to be agreed upon by the Employer and the Executive prior
     to the beginning of each fiscal year; provided, however, that the Executive
                                           --------  -------                    
     shall be entitled, on a bi-weekly basis, to extended weekends, which shall
     begin at approximately noon on Friday through approximately noon on Monday
     or equivalent time periods.  The Executive shall be entitled to participate
     in any and all employee benefit plans, medical insurance plans, life
     insurance plans, disability income plans, retirement plans and other
     benefit plans (including, without limitation, any 401(k) plans) from time
     to time in effect for senior executives of the Employer.  Such
     participation shall be subject to the terms of the applicable plan
     documents, generally applicable policies of the Employer, applicable law
     and the discretion of the Board of Directors, the Compensation Committee or
     any administrative or other committee provided for in or contemplated by
     any such plan.  Nothing contained in this Agreement shall be construed to
     create any obligation on the part of the Employer to establish any such
     plan or to maintain the effectiveness of any such plan which may be in
     effect from time to time.
<PAGE>
 
          The Executive also shall be entitled to reimbursement for all ordinary
     and necessary business expenses incurred by the Executive in connection
     with the advancement of Little Switzerland's and the Employer's interests
     and the discharge of his duties and responsibilities hereunder, including
     without limitation, all travel and lodging expenses; provided, however,
                                                          --------  ------- 
     that the Executive accounts promptly for such expenses to the Employer in
     the manner reasonably prescribed from time to time by the Employer and in
     compliance with the Employer's policy.

     4.   Capacity and Extent of Service.
          ------------------------------ 

          a.  The Executive shall serve the Employer as Executive Vice President
     and Chief Financial Officer beginning on September 10, 1998 and shall serve
     the Employer in such other or additional offices in which he may be
     reasonably requested to serve.

          b.  During his employment hereunder, the Executive shall, subject to
     the direction and supervision of the Board of Directors of the Employer,
     devote his full business time, best efforts and business judgment, skill
     and knowledge to the advancement of the Employer's interests and to the
     discharge of his duties and responsibilities hereunder.  In accordance with
     the foregoing, the Executive shall not engage in any other business
     activity, except as may be approved by the Board of Directors of Little
     Switzerland; provided, however, that nothing herein shall be construed as
                  --------  -------                                           
     preventing the Executive from:

               (1) investing his assets in a manner not otherwise prohibited by
          this Agreement, and in such form or manner as shall not require any
          material services on his part in the operations or affairs of the
          companies or other entities in which such investments are made;

               (2) serving on the board of directors of any company, provided
          that he shall not be required to render any material services with
          respect to the operations or affairs of any such company; or

               (3) engaging in religious, charitable or other community or non-
          profit activities which do not impair his ability to fulfill his
          duties and responsibilities under this Agreement.

     5.   Termination and Termination Benefits.  Notwithstanding the provisions
          ------------------------------------                                 
of Section 2, subject to the following provisions, the Executive's employment
hereunder shall terminate under the following circumstances without further
liability on the part of the Employer or right of the Executive to receive any
payments hereunder:

          a.  Death.  In the event of the Executive's death during the
              -----                                                   
     Executive's employment hereunder, the Executive's employment shall
     terminate on the date of his death.

          b.  Termination by the Employer for Cause.  The Executive's employment
              -------------------------------------                             
     hereunder may be terminated for cause (as defined below) by written notice
     to the Executive setting forth in reasonable detail the nature of such
     cause, effective upon delivery of such notice.  The determination of
     whether cause existed for terminating the Executive's employment shall be
     made by a vote of at least two-thirds of the Board of Directors of Little
     Switzerland.  Only the following shall constitute "cause" for termination
     pursuant to this Section 5.b.:

                    (i)   Deliberate dishonesty of the Executive with respect to
          the Employer or any subsidiary or affiliate thereof;
<PAGE>
 
                    (ii)  Conviction of the Executive of (A) a felony or (B) any
          crime involving moral turpitude, deceit, dishonesty or fraud; or

                    (iii) Gross negligence or willful misconduct of the
          Executive with respect to the Employer or any subsidiary or affiliate
          thereof.

          c.  Termination by the Executive for Cause.  The Executive's
              --------------------------------------                  
     employment hereunder may be terminated by the Executive by written notice
     to the Board of Directors of Little Switzerland effective thirty (30) days
     after the giving of such notice in the event of a material breach by the
     Employer of any provision of this Agreement, which breach shall continue
     for more than thirty (30) days after the date on which the Board of
     Directors of Little Switzerland receives such notice.

          d.  Termination by the Employer Without Cause.  The Executive's
              -----------------------------------------                  
     employment with the Employer may be terminated without cause by a two-
     thirds vote of all of the members of the Board of Directors of Little
     Switzerland on written notice to the Executive effective upon thirty (30)
     days after the giving of such notice.

          e.  Termination by the Executive Without Cause.  The Executive may
              ------------------------------------------                    
     terminate his employment with the Employer without cause on written notice
     to the Employer effective upon thirty (30) days after the giving such
     notice.

          f.  Disability.  If, due to physical or mental illness, the Executive
              ----------                                                       
     shall be disabled so as to be unable to perform substantially all of his
     duties and responsibilities hereunder (a "Substantial Disability"), the
     Employer may designate another executive to act in his place during the
     period of such disability.  For a period of up to two (2) months subsequent
     to the commencement of a Substantial Disability, the Employer shall
     continue to pay to the Executive his salary and benefits in accordance with
     Section 3 hereof.  If, at the end of such two-month period the Executive
     shall continue to have a Substantial Disability, the Executive's employment
     may be terminated by a two-thirds vote of all of the members of the Board
     of Directors of Little Switzerland.  If any question shall arise as to
     whether during any period the Executive suffered a Substantial Disability,
     the Executive may, and at the request of the Employer will, submit to the
     Employer a certification in reasonable detail by a physician selected by
     the Executive or his guardian to whom the Employer has no reasonable
     objection as to whether the Executive was so disabled and such
     certification shall for the purposes of this Agreement be conclusive of the
     issue. If such question shall arise and the Executive shall fail to submit
     such certification, the Employer's determination of such issue shall be
     binding on the Executive.

          g.  Participation in a Change of Control.  Notwithstanding anything to
              ------------------------------------                              
     the contrary contained herein, in the event that the Executive participates
     in a Change of Control (as defined below) of Little Switzerland which is
     not approved by the Board of Directors of Little Switzerland as constituted
     prior to such Change of Control, the Executive's employment shall terminate
     immediately upon delivery of notice of termination without further
     liability to the Employer or Little Switzerland, and any and all
     outstanding unvested options, benefits and severance obligations shall be
     canceled and terminated immediately upon such termination of employment.

          h.  Severance Benefit.  In the event the Executive's employment
              -----------------                                          
     hereunder is terminated pursuant to Sections 5.d. or 5.f. hereof, on the
     date of such termination, the Executive shall be entitled to receive a lump
     sum payment equal to twelve (12) months of Base Salary, plus any accrued
     but unpaid Annual Bonus which the Executive has earned pursuant to Section
     3.a. of this Agreement.
<PAGE>
 
     6.   Termination Subsequent to Change in Control.
          ------------------------------------------- 

          a.  Except as set forth in Section 5 above to the contrary, in the
     event of a Terminating Event (as defined below) within one year from the
     date of a Change in Control (as defined below) of Little Switzerland, as of
     the date of such Terminating Event, the Executive shall be entitled to
     receive a lump sum payment equal to twelve (12) months of Base Salary, plus
     any accrued and unpaid Annual Bonus which the Executive has earned pursuant
     to Section 3.a. of this Agreement.

          b.    For purposes of this Agreement, a "Terminating Event" shall mean
     termination by the Employer or its successor entity of the Executive for
     any reason other than death or cause pursuant to Section 5.a. or Section
     5.b. above.

          c.  For purposes of this Agreement, a "Change in Control" shall be
     deemed to have occurred in the following instances: (i) if there has
     occurred a change in control which Little Switzerland would be required to
     report in response to Item 1 of Form 8-K promulgated under the Securities
     Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation
     is no longer in effect, any regulations promulgated by the Securities and
     Exchange Commission pursuant to the 1934 Act which are intended to serve
     similar purposes; (ii) if there has occurred a change in control which
     Little Switzerland would be required to report in response to Item 6(e) of
     Schedule 14A promulgated under the 1934 Act, or, if such regulation is no
     longer in effect, any regulations promulgated by the Securities and
     Exchange Commission pursuant to the 1934 Act which are intended to serve
     similar purposes; (iii) when any "person" (as such term is used in Sections
     13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such
     term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
     indirectly, of securities of Little Switzerland representing fifteen
     percent (15%) or more of the total number of votes that may be cast for the
     election of Directors of Little Switzerland; (iv) the sale, transfer or
     other disposition of all or substantially all of the assets of Little
     Switzerland to another person or entity; (v) the election of Directors of
     Little Switzerland equal to one-third or more of the total number of
     Directors then in office who have not been nominated by Little
     Switzerland's Board of Directors or a committee thereof as constituted on
     the date hereof; or (vi) the signing of an agreement, contract or other
     arrangement providing for any of the transactions described above in this
     definition of Change in Control; provided, however, that a "Change in
                                      --------  -------                   
     Control" shall not be deemed to have occurred as a result of the beneficial
     ownership of Little Switzerland's Common Stock by any person who is a
     "Grandfathered Person" under Little Switzerland's Shareholder Rights
     Agreement dated July 17, 1991, as amended (the "Rights Agreement"), so long
     as such Grandfathered Person's beneficial ownership of Little Switzerland's
     Common Stock does not exceed such Grandfathered Person's "Grandfathered
     Percentage" (as defined in the Rights Agreement).

     7.   Noncompetition and Confidential Information.
          ------------------------------------------- 

          a.  Noncompetition.  During the period of the Executive's employment
              --------------                                                  
     by the Employer pursuant to this Agreement or otherwise, the Executive will
     not, directly or indirectly, whether as owner, partner, shareholder,
     consultant, agent, employee, co-venturer or otherwise, or through any
     Person (as defined in Section 9 hereof), compete in Little Switzerland's or
     the Employer's market area (defined as any country or other jurisdiction in
     which Little Switzerland or the Employer conducts business as of the
     effective date of termination) with the business conducted by Little
     Switzerland or the Employer during the period of his employment hereunder,
     nor will he attempt to hire any employee of Little Switzerland or the
     Employer, assist in such hiring by any other Person, encourage any such
     employee to terminate his or her relationship with Little Switzerland or
     the Employer, or solicit or encourage any customer of Little Switzerland or
     the
<PAGE>
 
     Employer to terminate its relationship with Little Switzerland or the
     Employer or to conduct with any other Person any business or activity which
     such customer conducts or could conduct with Little Switzerland or the
     Employer.

          b.  Confidential Information.  The Executive will not disclose to any
              ------------------------                                         
     other Person (except as required by applicable law or in connection with
     the performance of his duties and responsibilities hereunder), or use for
     his own benefit or gain, any confidential information of Little Switzerland
     or the Employer obtained by him incident to his employment with the
     Employer.  The term "confidential information" includes, without
     limitation, financial information, business plans, prospects and
     opportunities (such as lending relationships, financial product
     developments, or possible acquisitions or dispositions of businesses or
     facilities) of Little Switzerland or the Employer but does not include any
     information which has become part of the public domain by means other than
     the Executive's non-observance of his obligations hereunder.

          c.  Relief; Interpretation.  The Executive agrees that the Employer
              ----------------------                                         
     shall be entitled to injunctive relief for any breach by him of the
     covenants contained in Sections 7.a. or 7.b.  In the event that any
     provision of this Section 7 shall be determined by any court of competent
     jurisdiction to be unenforceable by reason of its being extended over too
     great a period of time, too large a geographic area, or too great a range
     of activities, it shall be interpreted to extend only over the maximum
     period of time, geographic area, or range of activities as to which it may
     be enforceable. For purposes of this Section 7, the term "Employer" shall
     mean L.S. Wholesale, Inc. and any of its subsidiaries, affiliates,
     predecessors and successors.

     8.   Conflicting Agreements.  The Executive hereby represents and warrants
          ----------------------                                               
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar covenants which would affect the performance of his
obligations hereunder.

     9.   Definition of "Person".  For purposes of this Agreement:  the term
          ----------------------                                            
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.

     10.  Taxation of Payments and Benefits.
          --------------------------------- 

          a.  The Employer shall undertake to make deductions, withholdings and
     tax reports with respect to payments and benefits under this Agreement to
     the extent that it reasonably and in good faith believes that it is
     required to make such deductions, withholdings and tax reports.  All
     payments made by the Employer under this Agreement shall be net of any tax
     or other amounts required to be withheld by the Employer under applicable
     law.  Nothing in this Agreement shall be construed to require the Employer
     to make any payments to compensate the Executive for any adverse tax effect
     associated with any payments or benefits or for any deduction or
     withholding from any payment or benefit.

          b.  Notwithstanding the foregoing, the Employer shall pay to the
     Executive an additional payment (the "Gross-up Payment") for otherwise
     taxable reimbursements made to the Executive under Section 3.c. of this
     Agreement.  The Gross-up Payment shall be determined by taking the total
     amount of the Living Expense deemed to be compensation to the Executive and
     dividing such amount by .56.

     11.  Arbitration of Disputes.   Any controversy or claim arising out of or
          -----------------------                                              
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination
<PAGE>
 
of that employment (including, without limitation, any claims of unlawful
employment discrimination whether based on age or otherwise) shall, to the
fullest extent permitted by law, be settled by arbitration in any forum and form
agreed upon by the parties or, in the absence of such an agreement, under the
auspices of the American Arbitration Association ("AAA") in Boston,
Massachusetts in accordance with the Employment Dispute Resolution Rules of the
AAA, including, but not limited to, the rules and procedures applicable to the
selection of arbitrators. In the event that any person or entity other than the
Executive or the Employer may be a party with regard to any such controversy or
claim, such controversy or claim shall be submitted to arbitration subject to
such other person or entity's agreement. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. This Section
11 shall be specifically enforceable. Notwithstanding the foregoing, this
Section 11 shall not preclude either party from pursuing a court action for the
sole purpose of obtaining a temporary restraining order or a preliminary
injunction in circumstances in which such relief is appropriate; provided,
                                                                 --------
however, that any other relief shall be pursued through an arbitration
-------
proceeding pursuant to this Section 11.

     12.  Assignment; Successors and Assigns, etc.  Neither the Employer nor the
          ---------------------------------------                               
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided, however, that the Employer may assign its rights under this
       --------  -------                                                    
Agreement without the consent of the Executive in the event that the Employer
shall hereafter effect a reorganization, consolidate with or merge into any
other Person, or transfer all or substantially all of its properties or assets
to any other Person.  This Agreement shall inure to the benefit of and be
binding upon the Employer and the Executive, their respective successors,
executors, administrators, heirs and permitted assigns.

     13.  Enforceability.  If any portion or provision of this Agreement shall
          --------------                                                      
to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.

     14.  Waiver.  No waiver of any provision hereof shall be effective unless
          ------                                                              
made in writing and signed by the waiving party.  The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.

     15.  Notices.  All notices, requests, demands and other communications
          -------                                                          
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at its main offices, attention of the
Board of Directors.  Any such notice shall be deemed to be effective and
therefore given upon the following dates: (i) if such notice is delivered in
person the date on which such delivery is done; or (ii) if such notice is sent
by registered or certified mail, postage prepaid, the date which is three (3)
days subsequent to the date on which such notice is mailed.

     16.  Amendment.  This Agreement may be amended or modified only by a
          ---------                                                      
written instrument signed by the Executive and by a duly authorized
representative of the Employer.

     17.  Governing Law; Consent to Jurisdiction.  It is the parties' intention
          --------------------------------------                               
that the terms of employment under this Agreement shall be construed under and
be governed in all respects by the laws of The Commonwealth of Massachusetts.
To the extent that any court action is permitted consistent with or to enforce
Section 11 of this Agreement, the parties hereby consent to the jurisdiction of
the Superior Court of The Commonwealth of Massachusetts and the United States
District Court for the District of Massachusetts. Accordingly, with respect to
any such court action, the Executive (a) submits to the personal jurisdiction of
<PAGE>
 
such courts; (b) consents to service of process; and (c) waives any other
requirement (whether imposed by statute, rule of court, or otherwise) with
respect to personal jurisdiction or service of process.

     18.  Counterparts.  This Agreement may be executed in any number of
          ------------                                                  
counterparts, each of which when so executed and delivered shall be taken to be
an original, but such counterparts shall together constitute one and the same
document.

                  [Remainder of Page Intentionally Left Blank]
<PAGE>
 
     IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by each of the Employer and Little Switzerland, by their duly authorized
officers, and by the Executive, as of the date first above written.

                                    L.S. WHOLESALE, INC.


                                    By:/s/ C. William Carey
                                       --------------------
                                      Name: C. William Carey
                                      Title:   President and CEO


                                    LITTLE SWITZERLAND, INC.


                                    By:/s/ C. William Carey
                                       --------------------
                                      Name: C. William Carey
                                      Title:   President and CEO



                                        /s/ David Nace
                                        --------------
                                    David Nace