Key Takeaways
- Effective July 1, 2026, employers in Tennessee are prohibited from requiring, requesting, or enforcing noncompete agreements against employees earning less than $70,000 in annualized compensation.
- The new law applies to noncompete agreements entered into, renewed, or amended on or after July 1, 2026.
- Clauses restricting competition for two years or less are generally presumed reasonable under the law.
- The statute gives courts the authority to modify noncompetes to ensure compliance with the law.
- The new statute applies to noncompete agreements with both employees and independent contractors.
Tennessee HB1034 is joining the nationwide trend of limiting the enforceability of noncompete agreements for employees earning less than $70,000 – but also adding limited presumptions of enforceability for workers earning above the threshold. After Virginia and Washington enacted legislation banning or significantly restricting noncompetes, Tennessee Gov. Bill Lee followed suit by signing House Bill 1034, which takes effect July 1.
Compensation Threshold
Most notably, the new statute prohibits employers from requiring or requesting a noncompete agreement from, or enforcing one against, an employee whose annualized compensation is less than $70,000. The statute defines annualized compensation broadly to include wages, salary, commissions, nondiscretionary bonuses and other forms of remuneration. For hourly employees, annualized compensation is calculated by multiplying the employee’s hourly rate by 40 and then by 52.
Rebuttable Statutory Presumptions
The statute also establishes rebuttable presumptions to guide courts in evaluating the reasonableness of noncompete time restrictions. Tennessee courts have traditionally considered duration and geographic scope when evaluating the reasonableness of noncompetes. The new statute provides benchmarks for determining reasonableness:
- For former employees and independent contractors, a restraint of two years or less is presumed to be a reasonably restricted time period, unless connected to the sale of a business.
- For agreements related to the sale of a business, a restraint for the longer of five years or the period during which payments to the seller are made is presumed a reasonably restricted time period.
- For current or former distributors, dealers, franchisees, lessees, or licensees, a restraint of three years or less is presumed a reasonable time restriction.
Restrictions exceeding these time frames are presumed unreasonable. However, these presumptions do not make longer restraints automatically unenforceable; rather, they shift the burden to the party seeking enforcement to justify the extended duration. Importantly, noncompete restrictions remain disfavored restraints on trade and the employer still must show legitimate business interests, consideration, and a reasonable work restriction, among other facts, for the noncompete to pass muster.
Separate Requirements for Healthcare Workers
As is the case in other states, healthcare entities generally face greater restrictions when attempting to enforce noncompete agreements in Tennessee. This separate preexisting law applicable to healthcare entities (Tenn. Code Ann. § 63-1-148), remains in place and includes a two-year-or-less restricted time requirement and a separate mandate pertaining to any geographic restriction. Specifically, a geographic restriction in a healthcare provider’s noncompete may be a 10-mile radius from the location where the healthcare provider primarily practiced, or the county where the healthcare provider primarily practiced, while employed or contracted, whichever is greater. Alternatively, the noncompete can limit the healthcare provider from “practicing the healthcare provider’s profession at any facility at which the employing or contracting entity provided services while the healthcare provider was employed or contracted with the employing or contracting entity.”
Blue Penciling
The statute grants courts the authority to modify or “blue pencil” noncompete agreements to render them reasonable and enforceable. This judicial power allows courts to modify terms that are overly broad or otherwise noncompliant, rather than void the agreement in its entirety.
The New Law Does Not Alter Confidentiality and Nonsolicitation Agreements
Although the new law restricts noncompete agreements, employers remain permitted to enforce confidentiality, nondisclosure, and nonsolicitation agreements consistent with existing law.
What Employers Should Do Now
Businesses should review and update their noncompete agreements for Tennessee employees and contractors before July 1. Businesses should also consider appropriate nonsolicitation restrictions as well as confidentiality agreements, particularly for workers impacted by these changes. Please contact the authors of this alert or your BakerHostetler attorney contact if you have any questions.
