Tennessee is on the verge of enacting sweeping changes to the enforceability of restrictive covenants. A bill that cleared both chambers of the General Assembly in April now awaits Governor Bill Lee’s signature and enactment is widely expected. If signed, the law will take effect on July 1, 2026, and will apply to any restrictive covenant agreement entered into, renewed, or amended on or after that date. The new framework does not eliminate non-competes entirely, but it does impose meaningful constraints—including an income floor and statutory presumptions regarding permissible duration—that will require employers to reassess their current practices.
Background
As originally introduced, HB 1034 proposed a blanket prohibition on non-compete agreements in Tennessee, barring enforcement of any restriction on an employee’s or independent contractor’s ability to practice their profession following the end of an engagement. That version passed the House by a wide margin in mid-April. The Senate, however, replaced the outright ban with a more nuanced regulatory framework, which passed 28-4 on April 20. The House concurred in the Senate's substitute, and the bill received the Speaker’s signature on April 30.
What Changes
1. The $70,000 Income Threshold.
Perhaps the most significant change for day-to-day employment practices is the new categorical prohibition on non-compete agreements for employees earning less than $70,000 in annualized compensation. This threshold applies regardless of the employee’s role or access to confidential information or the employer’s asserted business justification.
Annualized compensation for purposes of this provision includes wages, salary, commissions, and non-discretionary bonuses. For hourly employees, the calculation is the employee’s hourly rate multiplied by 40 hours per week, multiplied by 52 weeks. Any non-compete agreement that violates this requirement will be void and unenforceable as a matter of public policy.
2. Rebuttable Presumptions on Duration.
Right now, Tennessee courts assess the reasonableness of a non-compete’s duration through a fact-intensive, case-by-case analysis with no specific statutory benchmarks (outside the healthcare context). The new law changes that by establishing tiered rebuttable presumptions tied to the type of restricted party.
Under the proposed bill, a restrictive covenant’s duration is presumed reasonable if it does not exceed the following limits:
- Employees and independent contractors: two years following the end of the relationship.
- Distributors, dealers, franchisees, lessees, and trademark licensees: three years following the end of the relationship.
- Sellers of a business or equity interest: the longer of five years or the duration of any earn-out or payment period owed to the seller.
Restraints exceeding these thresholds are presumed unreasonable, which means the burden shifts to the party seeking enforcement to demonstrate the longer duration is justified under the circumstances. Notably, these are presumptions, not hard caps, and employers may still argue that a longer restriction is warranted in a particular case, but they will bear the evidentiary burden of overcoming the statutory presumption.
The statute also expressly preserves courts’ authority to modify an overbroad restrictive covenant rather than voiding it entirely, a feature consistent with existing Tennessee jurisprudence.
What Stays the Same
Importantly, the legislation does not affect an employer’s ability to enforce confidentiality or nondisclosure agreements, customer or client non-solicitation agreements, or employee non-solicitation agreements. These instruments remain fully enforceable provided they satisfy existing reasonableness standards under Tennessee law. For many employers—particularly those with lower-compensated workforces—these tools will become increasingly important as alternatives to non-compete provisions.
In addition, existing non-compete agreements that are not renewed or amended will not be retroactively affected. However, employers should be aware that routine renewals or amendments—even if unrelated to the restrictive covenant itself—could bring an existing agreement within the scope of the new law. For example, if an employment agreement containing a non-compete clause includes an auto-renewal provision, the next automatic renewal occurring on or after July 1 would subject that agreement to the new statutory requirements, even if the non-compete terms themselves remain unchanged.
Recommended Steps for Employers
Given the approaching effective date, employers with Tennessee-based employees or operations should consider taking the following steps promptly:
First, conduct an inventory of all existing restrictive covenant agreements, identifying which contain non-compete provisions, the duration of those restrictions, and the compensation levels of the covered individuals.
Second, identify any employees or prospective hires earning below the $70,000 threshold and ensure that no non-compete agreement is presented to or executed by those individuals on or after July 1, 2026. For this population, employers should evaluate whether enhanced confidentiality and non-solicitation protections can adequately safeguard legitimate business interests.
Third, review the duration of existing non-compete provisions against the new presumptive limits. Agreements with restraint periods exceeding two years for employees and independent contractors should be assessed for litigation risk in light of the shifting burden of proof.
Fourth, exercise caution before renewing or amending any existing restrictive covenant agreement after July 1, as doing so will subject the agreement to the new statutory requirements.
Fifth, update template agreements and onboarding materials to conform to the new framework and ensure human resources personnel and hiring managers understand the circumstances under which non-competes may and may not be utilized going forward.
Conclusion
Tennessee’s new restrictive covenant legislation represents a significant shift toward greater statutory specificity in an area of law that has historically been governed almost exclusively by judicial discretion. While the law narrows the circumstances under which non-competes may be enforced, it also provides employers with more clear guideposts for drafting enforceable agreements.
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