Tennessee Joins Nationwide Trend in Imposing New Restrictions on Noncompete Agreements

Recently, Governor Bill Lee signed House Bill 1034 into law. The legislation makes two significant changes: (1) it prohibits employers from requiring, requesting, or enforcing a noncompete agreement against an employee who earns under $70,000, and (2) it imposes rebuttable presumptions of reasonableness for the duration of restrictive covenants, most notably of two years or less for employees and independent contractors, and five years or less for sales of business (unless the payment period for the sale exceeds five years, in which the longer term applies). The new law takes effect on July 1 and applies prospectively to agreements entered into, renewed, or amended on or after that date. 

Background

Until this legislation, Tennessee only regulated noncompetes for health care providers, which, among other things, limited such noncompetes to two years or less in duration and limited their geographic scope to a 10-mile radius from the health care employee’s primary practice site or to the county where the primary practice site is located, whichever is greater. See Tenn. Code Ann. § 63-1-148. 

Otherwise, the reasonableness of noncompetes was only determined by standards formulated by Tennessee courts that required them to examine whether the employee had a legitimate business interest to be protected by a noncompete and whether it was reasonable. The former was a fact-intensive inquiry that required a court to consider several factors, including the harm to the employer absent the noncompete and the economic hardship imposed on the employee. Id. The new law does not eliminate that analysis; rather, it adds statutory guideposts that will affect how courts will enforce noncompete provisions going forward. 

Statutory Information

Tenn. Code Ann. §§ 50-1-210, 211, as enacted by House Bill 1034

Enacted By: Governor Bill Lee

Effective Date: July 1, 2026

Analysis and Outcome

Prohibition on Noncompetes for Employees Earning Less Than $70,000

The centerpiece of House Bill 1034 is a new compensation threshold. Employers may not require, request, or enforce a noncompete agreement against an employee whose annualized compensation is less than $70,000. A noncompete agreement executed in violation of that rule is void and unenforceable as a matter of Tennessee public policy. Annualized compensation means the total compensation from the employer, including wages, salary, commissions, nondiscretionary bonuses, and other forms of remuneration, calculated on an annualized basis. For hourly employees, annualized compensation must be calculated by multiplying the employee’s hourly rate by 40 and then multiplying that product by 52. 

The wage threshold applies only to employees; it does not apply to independent contractors, and the restriction is limited to noncompetes and does not apply to other restrictive covenants like non-solicitation and non-disclosure agreements. 

A noncompete that violates this provision is void and unenforceable as a matter of public policy. 

New Rebuttable Presumptions for Restrictive Covenant Duration

Unlike the above compensation cap, Tennessee’s new rebuttable presumption applies to “restrictive covenants” and is not expressly limited to noncompetes. A restrictive covenant is presumed reasonable if its duration falls within its applicable statutory period. If it does not, the restraint is presumed unreasonable. 

The statute provides three different rebuttable statutory presumptions, dependent on the nature of the noncompete: 

• For former employees and independent contractors, outside the sale of a business interest context, a restraint of two years or less measured from the termination of the employment or business relationship is presumed reasonable. 

• For current or former distributors, dealers, franchisees, lessees of real or personal property, and licensees, outside the sale of a business interest context, a restraint of three years or less measured from the date of termination of the business relationship is presumed reasonable. 

• In the sale-of-business context, a restraint is presumed reasonable if it is the longer of five years or less, or a period equal to the time during which payments are made to the owner or seller and the restrictive covenant is a “material part” of the agreement. 

To be sure, the law does not require courts to conclude that all restrictive covenants that are within the above duration thresholds are reasonable as a matter of law; nor does the law require courts to conclude that all restrictive covenants with durations greater than the presumptive durations are unlawful. Rather, the law presumes covenants within the stated duration periods to be reasonable and presumes covenants with duration periods greater than stated durations to be unreasonable, meaning that evidence may be submitted to rebut the presumption. 

Notably for employers, the statute expressly permits courts to modify the duration component of restrictive covenants to render them reasonable and enforceable. 

What the Legislation Does Not Change

The new law does not eliminate other commonly used tools for protecting business interests. The statute’s reasonableness-presumption section does not prohibit an employer from enforcing a confidentiality or non-disclosure agreement, a client or customer non-solicitation agreement, or an employee non-solicitation agreement. Therefore, employers that can no longer use noncompetes for employees below the $70,000 threshold may need to rely more heavily on carefully drafted confidentiality and non-solicitation provisions. 

Why It Matters

Tennessee’s new statute reflects the continuing national trend toward restricting and defining the use of noncompete agreements. 

Employers with Tennessee workers should review noncompete practices before the July 1 effective date. That review should include identifying employees subject to noncompetes; confirming whether covered employees meet the $70,000 annualized compensation threshold; updating templates for agreements entered into, renewed, or amended on or after the effective date to reflect the presumptive duration periods or note justifications for greater periods; and evaluating whether confidentiality, customer non-solicitation, and employee non-solicitation agreements may provide additional protection where noncompetes are no longer available.