Palmitic acid (PA) is ubiquitous in the biosphere and its hydrogen isotopic composition (δ2HPA) was proposed as a potential paleoenvironmental proxy for salinity, with δ2HPA values increasing with salinity. In this study, we analyzed 40 surface sediment samples from Baffin Bay and the Labrador Sea to examine the isotopic composition of PA in relation to local environmental variables, including salinity. In contrast to expectations, our results show a negative relationship between the δ2HPA and sea‐surface salinity, raising questions about its pertinence and usefulness as a salinity proxy. Instead, our results suggest that the relative abundance of distinct organisms that employ different metabolisms is the key in determining the hydrogen isotopic fractionations in PA. While we show that PA is mostly produced through photoautotrophic metabolisms by diatoms and dinoflagellates, varying contributions from heterotrophic metabolisms may obscure the stable isotope composition of PA. Surprisingly, we found no correlation between the stable carbon isotopic composition of the sedimentary organic matter (δ13Corg) and PA (δ13CPA), implying major differences in either the dominant organisms producing sedimentary PA or in carbon isotope fractionation during lipid biosynthesis. We also found that the presence of extended sea‐ice cover leads to enriched carbon and hydrogen isotopic compositions in PA. These enriched values suggest heterotrophic biodegradation in the water column and/or in the sediment as well as an increase in grazing activities. We propose that sea‐ice cover and surface water oxygenation modulate the relative impact of phototrophic and heterotrophic metabolisms, and therefore the isotopic composition of marine sedimentary PA. Plain Language Summary: Fatty acids are composed of a chain of carbon and hydrogen atoms. The chain length can be diagnostic of the sources of organic matter (OM), long chains being produced by terrestrial plants whereas short chains originate from algae and bacteria. Hence, the chain length of lipids preserved in sediments can be used to reconstruct OM sources and paleoenvironmental conditions. In this study, we analyzed the composition of palmitic acid (PA, 16 carbon atoms) in 40 surface sediment samples from Baffin Bay and the Labrador Sea. PA can be produced by phototrophic and heterotrophic algae, and microbes. Our results reveal that high PA concentrations reflect the dominance of local OM production in the study region. We find that variations in overlying salinity or temperature are not recorded in the isotopic composition of the sedimentary PA. Instead, we find evidence that the relative abundance of photoautotrophic and heterotrophic metabolisms influences the PA isotopic composition. Thus, less negative isotopic values are caused by higher heterotrophic biodegradation in the water column and/or in the sediment. We propose that PA can be an indicator of the specific sources of OM in marine sediments and benthic food webs. Key Points: The hydrogen isotopic composition of palmitic acid (PA) is not a proxy for salinity in subarctic environmentsThe stable carbon and hydrogen isotopic compositions of PA are indicators of the different metabolic sources of organic matterUnder stronger seasonal sea‐ice cover, heterotrophic metabolisms lead to enriched PA carbon and hydrogen isotopic compositions [ABSTRACT FROM AUTHOR]