Tennessee Enacts Significant Changes to Noncompete Law Through HB 1034

Tennessee’s new noncompete law establishes presumptive reasonableness periods for restrictive covenants and prohibits employee noncompetes for workers earning less than $70,000 annually, creating a new statutory framework for post-employment noncompete restrictions. The law goes into effect July 1, 2026 and will apply prospectively.

Tennessee’s enactment of HB 1034 marks a significant development in the state’s restrictive covenant landscape, codifying presumptive reasonableness periods for noncompete agreements and prohibiting noncompetes for lower-compensated employees. The legislation also creates a new statutory framework governing the enforceability of restrictive covenants following the termination of employment or business relationships.

The law adds Sections 50-1-210 and 50-1-211 to the Tennessee Code and reflects a broader national trend toward increased scrutiny of employee noncompete agreements while still preserving Tennessee’s generally employer-friendly approach to reasonable post-employment restraints.

STATUTE CREATES REBUTTABLE PRESUMPTIONS REGARDING DURATION

The legislation creates rebuttable presumptions governing the reasonableness of restrictive covenant durations.

Courts are required to presume that any duration greater than the applicable presumptively reasonable period are unreasonable.

Under Section 50-1-210(b)(1), courts must presume reasonable a restrictive covenant that

• is two years or less in duration, measured from the termination of the relationship; and
• is not connected to the sale of a business or ownership interest.

This provision is significant because Tennessee historically relied heavily on common-law reasonableness analysis without bright-line statutory duration guidance. The new framework provides employers and litigants with substantially greater predictability regarding enforceable time periods.

SEPARATE STANDARDS APPLY TO FRANCHISE AND DISTRIBUTION RELATIONSHIPS

The law establishes a longer presumptively reasonable period for certain commercial relationships.

Section 50-1-210(b)(2) provides that a restraint of three years or less is presumed reasonable when enforced against a current or former

• distributor,
• dealer,
• franchisee,
• lessee of real or personal property, or
• trademark, trade dress, or service mark licensee.

The provision applies where the covenant is not associated with the sale of a material ownership interest or business assets.

This distinction reflects legislative recognition that franchise and distribution relationships often involve different competitive dynamics and investment structures than traditional employment relationships.

BUSINESS SALE COVENANTS RECEIVE EXPANDED PROTECTION

For restrictive covenants arising from the sale of a business or ownership interest, the statute adopts a substantially more permissive standard.

Section 50-1-210(b)(3) establishes a presumption of reasonableness for restraints lasting the longer of

• five years or less, or
• the duration of seller payment obligations.

The provision applies to sales involving

• assets of a business,
• corporate shares,
• partnership interests,
• LLC membership interests, or
• other equity or profit interests.

This aspect of the legislation is consistent with longstanding judicial willingness to enforce broader restraints in the sale-of-business context, where courts traditionally recognize the purchaser’s interest in protecting acquired goodwill.

TENNESSEE PROHIBITS NONCOMPETES FOR EMPLOYEES EARNING LESS THAN $70,000

The law also imposes a compensation threshold restricting the use of employee noncompetes.

The new Section 50-1-211 prohibits employers from requiring, requesting, or enforcing a noncompete agreement against employees earning less than $70,000 annually. The compensation threshold applies to employees and does not expressly extend to independent contractors.

The statute broadly defines “annualized compensation” to include

• wages,
• salary,
• commissions,
• nondiscretionary bonuses, and
• other forms of remuneration.

For hourly employees, annualized compensation must be calculated using a standardized formula based on a 40-hour workweek and a 52-week year.

Importantly, noncompetes executed in violation of the statute are deemed “void and unenforceable as a matter of public policy.”

The legislation does not specifically index the compensation threshold to inflation.

CERTAIN RESTRICTIVE COVENANTS REMAIN OUTSIDE THE STATUTE

The law expressly preserves employers’ ability to enforce several categories of restrictive covenants.

Section 50-1-210(c) states that the section does not prohibit enforcement of

• confidentiality and nondisclosure agreements,
• customer or client nonsolicitation agreements, or
• employee nonsolicitation agreements.

As a result, Tennessee employers may increasingly rely on appropriately tailored nonsolicitation and confidentiality protections for employees who fall below the statutory compensation threshold.

COURTS RETAIN BLUE-PENCIL AUTHORITY

The statute authorizes courts to modify overbroad restrictive covenants to render them reasonable and enforceable, while separately providing that noncompetes applicable to employees making below the income threshold will be void.

This codifies Tennessee courts’ continued ability to reform restrictive covenants deemed overbroad, rather than invalidate them entirely, in appropriate circumstances.

PRACTICAL IMPLICATIONS FOR EMPLOYERS

Employers operating in Tennessee should consider reviewing and revising restrictive covenant agreements to ensure compliance with the new statutory framework for agreements going forward.

In particular, employers should consider

• auditing compensation levels for employees subject to noncompetes;
• revising template agreements to align with the statute’s presumptive duration periods;
• evaluating whether lower-wage employee protections can instead be addressed through confidentiality or nonsolicitation covenants;
• reassessing franchise, dealer, and distributor agreements in light of the new presumptions; and
• reviewing transaction-related restrictive covenants in acquisition documents.

Although the law provides greater clarity regarding permissible durations, it is likely to generate litigation concerning the rebuttable presumptions and the interaction between the new statute and Tennessee's existing common-law standards governing legitimate business interests, geographic scope, and overall reasonableness.

AMBIGUITIES IN THE NEW LAW

The law leaves open some questions for interpretation. Like similar statutes in other jurisdictions, the new provisions do not clearly define the term “noncompete.”

Further, the portion of the law addressing presumptively reasonable durations refers broadly to “restrictive covenants” rather than noncompetes alone, implying that the reasonableness presumptions apply to all restrictive covenants and are not limited to noncompetes. By contrast, the section addressing income thresholds refers specifically to “noncompetes.”

The new law is also silent as to its application to customer non-accept and non-service restrictions.

Such ambiguities may take litigation or further legislative amendments to clarify.

LOOKING AHEAD

HB 1034 places Tennessee among a growing number of states adopting statutory limitations on employee noncompetes while still permitting reasonable restrictive covenants for higher-compensated workers and business-sale transactions.