Joining Washington and Virginia, Tennessee becomes the third state in the past two months to pass significant legislation affecting restrictive covenants. Tennessee House Bill 1034 (1) establishes rebuttable time restraint presumptions for restrictive covenants in the employment, commercial, and sale of business contexts, and (2) bans noncompete agreements for employees earning less than $70,000. The legislation is awaiting Governor Bill Lee’s signature and, if enacted, will take effect on July 1, 2026, and apply to proceedings occurring and agreements entered into, renewed, or amended on or after that date.
Tennessee courts traditionally have applied a general reasonableness analysis to determine whether the duration of a restrictive covenant is no broader than necessary to protect a legitimate business interest. While certain time periods evolved under the common law to be more likely reasonable depending upon the context, the legislation states that courts should presume the following time restraints to be reasonable:
- Two (2) years or less in duration for employees and independent contractors measured from the date the employment or business relationship terminates;
- Three (3) years or less in duration for distributors, dealers, franchisees, lessees, or licensees measured from the date of termination of the business relationship; and
- The longer of either five (5) years or less in duration for the sale of a business, assets, or equity interest, which is measured from the time of sale, or a period equal to the time during which payments are made to the owner or seller.
Any time restraint greater than these durations shall be presumed to be unreasonable.
The legislation further states that (A) a court may modify a restrictive covenant governed by the law to render it reasonable and enforceable; and (B) it does not prohibit an employer from enforcing a confidentiality or nondisclosure agreement, a client or customer nonsolicitation agreement, or an employee nonsolicitation agreement.
The legislation also prohibits employers from requiring, requesting or enforcing a noncompete agreement against an employee whose annualized compensation is less than $70,000. Annualized compensation means the total compensation an employee earns from the employer, including wages, salary, commissions, nondiscretionary bonuses, and other forms of remuneration, calculated on an annualized basis. For hourly employees, annualized compensation must be calculated by multiplying the employee’s hourly rate by forty and multiplying the product by fifty-two. A noncompete agreement executed in violation of this section is void and unenforceable as a matter of public policy.
Employers with Tennessee employees should take note of this development and, if the legislation is signed into law, update applicable agreements to comply with these requirements.
