Tennessee Limits Non-Compete Agreements With Lower Compensated Employees While Presuming That Restrictive Covenants Of Up To Two Years Are Reasonable In Duration

Beginning on July 1, 2026, Tennessee will bar noncompete agreements with employees who earn less than $70,000 per year.  For noncompete agreements with employees who earn $70,000 per year or more, and for other restrictive covenants, Tennessee’s new statute includes a presumption that a restriction that lasts two years or less is reasonable in duration. 

First, the new Tennessee statute provides that an employer shall not require, request or enforce a noncompete agreement against an employee whose annualized compensation is less than $70,000.  Annualized compensation includes wages, salary, commissions, nondiscretionary bonuses “and other forms of remuneration.”  The catch-all clause including other forms of remuneration is inclusive and broad, but the specific reference to “nondiscretionary bonuses” could raise questions about whether discretionary bonuses are included in calculating annualized compensation.  For hourly employees, the statute mandates that their annual compensation “must be calculated by multiplying the employee’s hourly rate by forty (40) and multiplying the product by fifty-two (52).” 

The compensation threshold will not apply to noncompete agreements that were entered into prior to the July 1, 2026 effective date unless those agreements automatically renew or are amended or restated after July 1, 2026.  The compensation threshold applies to agreements with “employees”, so the statute does not create a compensation threshold for noncompete agreements with independent contractors or others who are not employees.  Finally, this portion of the statute refers only to noncompete agreements, so it does not explicitly set a threshold compensation level for agreements not to solicit clients or employees (as long as they are not so broad to be considered noncompete agreements).

Second, the new Tennessee statute addresses when the length of a restrictive covenant is presumptively reasonable or unreasonable.  A court must presume that a restrictive covenant with an employee or independent contractor that lasts two years or less from the termination of employment or the business relationship is reasonable in length.  Conversely, a restrictive covenant with an employee or independent contractor that lasts more than two years from the termination of employment or the business relationship is presumptively unreasonable in length.  Similar presumptions apply to restrictive covenants of (a) three years in connection with a distributor, dealer, franchisee, lessee of property or licensee of a trademark, trade dress or service mark and (b) five years in connection with the sale of all or a material part of the assets of a business, the shares of a corporation, a partnership interest, a membership interest in an LLC, or any other equity interest or right to receive profits in a business.

The statutory presumptions about reasonableness pertain to “restrictive covenants”, not just “noncompete agreements”, so these presumptions also apply to agreements not to solicit clients or employees.  The presumptions in the statute are rebuttable, so a restrictive covenant longer than specified in the statute can be reasonable (and one shorter than specified in the statute can be unreasonable) if a party can demonstrate that a court should depart from the statutory presumption.  Finally, the statute authorizes (but does not require) courts to modify a restrictive covenant to make it reasonable and enforceable.    

While the statute addresses the reasonable duration of a restrictive covenant, it does not address when a restrictive covenant is reasonable in geographic reach or in scope of activities covered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.