Tennessee Employment Law

Several years ago, Tennessee passed a law which sets presumptions of reasonableness for noncompete agreements entered into with certain healthcare providers.  Tenn. Code Ann. § 63-1-148.  On May 7, 2026, Governor Bill Lee signed a bill establishing Tennessee’s first law governing noncompete agreements other than for healthcare providers.  The law becomes effective July 1, 2026, and applies to any restrictive covenant agreement entered into, renewed or amended after that date. 

$70,000 Threshold for Employees

The new noncompete statute prohibits noncompete agreements for employees who earn less than $70,000.00 annually in total compensation.  The law defines “annualized compensation” as the total compensation an employee earns from the employer, including wages, salary, commission, nondiscretionary bonuses and other forms of renumeration, calculated on an annualized basis.  For hourly employees, annualized compensation is calculated by multiplying the employee’s hourly rate by 40 and multiplying that product by 52. 

Rebuttable Presumptions

The new law also creates rebuttable presumptions that courts must apply when determining the reasonableness in time of a restrictive covenant sought to be enforced after the termination of an employment or business relationship.  The law draws distinctions between employees and independent contractors, those involved in a business relationship such as distributors, dealers, franchisees, lessees and licensees, and owners of a business. 

A court must presume as reasonable in time all of the following restrictive covenants:

1. For employees and independent contractors, a restraint of 2 years or less in duration, measured from the date the employment or business relationship terminates. 
2. For current or former distributors, dealers, franchisees, lessees of real or personal property or a licensee of trademark, trade dress or service mark, 3 years or less in duration, measured from the date of termination of the business relationship. 
3. For an owner or seller of all or a material part of the assets of a business, professional practice or other commercial enterprise, the shares of a corporation, a partnership interest, a membership interest in a limited liability company or any other equity interest or right to receive profits, the longer of five years or a period equal to the time during which payments are made to the owner or seller. 

Notably, in the context of a sale of all or part of a business the restrictive covenant must be “a material part” of the deal. 

The new law uses the term “restrictive covenants” with respect to the presumptions but uses the term “noncompete” with respect to the minimum annual compensation that an employee must earn.  Tenn Code Ann. § 50-1-211.  

What Did Not Change?

The new law does not prohibit employers from using and enforcing confidentiality and nondisclosure agreements, customer nonsolicitation agreements and employee nonsolicitation agreements. Tenn Code Ann. § 50-1-210(c). Based on the language in Tenn Code Ann. § 50-1-210, employers should assume that those types of restrictive covenants will be subject to the time duration presumptions of reasonableness set forth above. 

The new statute also preserves the court’s authority to “blue pencil” restrictive covenants and modify them to the degree the court determines is reasonable. 

The statute also does not alter the other facts a party must prove to enforce a restrictive covenant.  A party seeking enforcement still must prove a legitimate business interest for the restrictive covenants.  In Tennessee, this requires proof of (a) specialized, unique training; (b) access to, or knowledge of, confidential information/trade secrets; (c) customer contact such that customers view the employee (or contractor) as the face of the business. 

If a legitimate business interest is proven the party seeking enforcement must still also prove that the restrictive covenant is supported by adequate consideration, the covenant is not overbroad in scope of activities prohibited and the covenant is not overbroad with respect to the geographic or customer limitation. 

What Should You Do Now? 

With the July 1, 2026 effective date fast approaching employers and businesses who have restrictive covenants with contractors and other business associates should take the following steps now:

• Review existing restrictive covenant agreements for compliance with the new reasonableness presumptions. 
• Ensure that employees earning less than $70,000.00 in total annual compensation are not subject to noncompete agreements entered into, renewed or amended after July 1, 2026. 
• Consider whether a noncompete agreement is the most effective restrictive covenant to use going forward, or would you be better served with provisions protecting confidential information and prohibiting customer and employee solicitation. 

As always, if we can be of assistance, please do not hesitate to contact us.