ALERT – Tennessee Enacts New Restrictions on Non-Compete Agreements – 07/05/2026
Tennessee Enacts New Restrictions on Non-Compete Agreements
Employers using restrictive covenants in Tennessee should take note that on May 7, 2026, Tennessee Governor Bill Lee signed into law House Bill 1034, which amends Tenn. Code Ann. Title 50 by adding § 50-1-210 and § 50-1-211. These two sections place additional statutory limits on the enforceability of certain restrictive covenants.
Presumptions Regarding Reasonable Time Restrictions
Section 50-1-210 establishes a three-tiered analysis for a court to determine the reasonableness of a time restraint in a restrictive covenant. The first two categories described below apply only where the covenant is not associated with the sale or ownership of all or a material part of the assets of a business, shares of a corporation, partnership interests, membership interests in a limited liability company, or other similar business ownership interests. The third category governs covenants tied to the sale or ownership of those interests.
Employees and Independent Contractors
Where the covenant is sought to be enforced against a former employee or independent contractor, a time restraint of two (2) years or less, measured from the date the employment or business relationship terminates, is presumed reasonable.
Distributors, Dealers, Franchisees, Lessees, and Licensees
Where the covenant is sought to be enforced against a current or former distributor, dealer, franchisee, lessee of real or personal property, or licensee of a trademark, trade dress, or service mark, a time restraint of three (3) years or less, measured from the date of termination of the business relationship, is presumed reasonable.
Sale of Business Transactions
Where the covenant is sought to be enforced against the owner or seller of all or a material part of the assets of a business, shares of a corporation, or other similar business ownership interests, a time restraint that is the longer of five (5) years or less, or a period equal to the time during which payments are made to the owner or seller, is presumed reasonable.
Judicial Modification and Preserved Agreements
The court may modify a restrictive covenant governed by Section 50-1-210 to render it reasonable and enforceable.
Notably, the new law does not prohibit an employer from enforcing confidentiality or non-disclosure agreements, or client, customer, or employee non-solicitation agreements.
Prohibition on Non-Compete Agreements for Employees Earning Less Than $70,000
Newly created Section 50-1-211 creates a blanket prohibition on non-compete agreements as to employees earning less than $70,000 in annualized compensation. The statute provides that non-compete agreements “executed” in violation of this section are void and unenforceable as a matter of public policy.
“Annualized compensation” is defined to include wages, salary, commissions, nondiscretionary bonuses, and other forms of remuneration, calculated on an annualized basis. For hourly employees, annualized compensation is calculated by multiplying the employee’s hourly rate by 40 and multiplying the product by 52, which works out to a threshold of approximately $33.65 per hour. The Act is not clear as to whether the compensation threshold is measured at the time of execution of the restrictive covenant or the time of enforcement, and the inclusion of commissions and nondiscretionary bonuses within “annualized compensation” may complicate the analysis for employees with variable pay structures.
Application to Existing Agreements
One of the most significant unsettled questions under the Act is the extent to which it applies to restrictive covenants signed before July 1, 2026. Section 3 of the Act provides that the Act takes effect July 1, 2026, and “applies to proceedings occurring and agreements entering into, renewed, or amended, on or after that date.” That language combines two concepts that pull in different directions. The reference to “agreements entering into, renewed, or amended” suggests a prospective-only application, while the reference to “proceedings occurring … on or after that date” suggests that the Act may apply to any enforcement proceeding filed after the effective date, regardless of when the underlying agreement was signed. We do not yet have judicial guidance from Tennessee courts on how this language will be construed.
For the reasonableness presumptions in Section 50-1-210, we think the better reading is that the presumptions will apply to enforcement proceedings filed on or after July 1, 2026, even where the underlying agreement predates the effective date. The presumptions function as evidentiary rules that structure a court’s reasonableness analysis, and Tennessee courts have long applied a reasonableness analysis to non-compete enforcement. The judicial modification authority in Section 50-1-210(d) provides a mechanism for courts to address agreements that exceed the new presumptive time limits without invalidating them outright.
For the $70,000 compensation threshold in Section 50-1-211, the question is more difficult, and reasonable arguments can be made for different positions. Section 50-1-211(c) provides that agreements “executed in violation of” Section 50-1-211 are void as a matter of public policy. Because an agreement signed before July 1, 2026 cannot have been executed in violation of a statute that did not yet exist, the voiding provision in subsection (c) likely does not retroactively invalidate pre-effective-date agreements. However, Section 50-1-211(a) separately prohibits an employer from “requir[ing], request[ing], or enforc[ing]” a non-compete against a covered employee, and that language is not limited to agreements executed after the effective date. We think there is a meaningful argument that, beginning July 1, 2026, an employer may not initiate enforcement proceedings on a pre-existing non-compete against an employee earning less than $70,000, even if the agreement itself remains technically valid. We also recognize, however, that the “agreements entering into, renewed, or amended” language in Section 3 provides employers with a counterargument that the Act applies only prospectively to new, renewed, or amended agreements.
Until Tennessee appellate courts construe Section 3 and the interaction between subsections (a) and (c) of Section 50-1-211, employers should expect this issue to be litigated and should treat the question as genuinely unsettled. The conservative course is to assume that enforcement of a pre-existing non-compete against a sub-$70,000 employee will face a substantial defense after July 1, 2026, and to plan accordingly.
Effective Date
The Act takes effect July 1, 2026, and applies to proceedings occurring and agreements entered into, renewed, or amended on or after that date.
Other Considerations
This new law does not address other provisions typically included in restrictive covenants that can render them unenforceable or subject them to revision where a court considers the terms unreasonable, such as overly broad geographic restraints or other terms that effectively prevent an employee from finding employment.
Practical Considerations for Employers
Employers should review existing restrictive covenant agreements before July 1, 2026, particularly agreements involving employees earning near or below the new compensation threshold. Employers should also evaluate whether current agreements contain reasonable geographic and functional limitations and whether revisions are appropriate for employees, independent contractors, franchise relationships, or business sale transactions.
For employees earning near the $70,000 threshold, employers may wish to consider whether a compensation adjustment before the effective date is appropriate. For sub-threshold employees whose post-employment restrictions remain a business priority, employers should consider whether the legitimate business interests previously protected by a non-compete can be protected instead through confidentiality or non-disclosure agreements, or client, customer, or employee non-solicitation agreements, all of which are expressly preserved under Section 50-1-210(c).
As usual, there are many questions concerning the interpretation and application of these new provisions, but employers utilizing restrictive covenants in Tennessee would be wise to consult with employment counsel prior to seeking enforcement of those covenants. We also urge employers utilizing restrictive covenants to consult with legal counsel to review and, if necessary, consider updating the terms of those restrictive covenants in light of this new law.