Tennessee Noncompete Overhaul Takes Effect July 1: What Employers Need to Know

Tennessee lawmakers recently reshaped the enforceability of noncompete agreements. Public Chapter No. 934 (House Bill 1034) adds statutory presumptions and compensation-based restrictions on noncompetes. It also shifts the state away from a purely fact-intensive, common-law approach toward a more structured, predictable framework for evaluating these agreements.

These changes apply to agreements entered into, renewed or amended on or after July 1.

How does the new law change noncompete enforcement?

The law makes it easier to enforce some restrictive covenants, updates the way courts assess them, and protects lower‑wage employees by prohibiting them in some cases.

Designated Tenn. Code Ann. §§ 50-1-210 and 50-1-211, it marks a shift from the historically fact-intensive approach taken by Tennessee courts, which previously assessed each agreement based on the specific context and relationship between the parties involved. The legislation codifies rebuttable presumptions concerning the enforceability of restrictive covenants, modifies the traditional common-law approach, and introduces categorical prohibitions for lower-wage earning employees.

Historical Enforcement Methods

Tennessee courts currently analyze noncompete agreements under a balancing test that relies on a flexible, fact-intensive framework grounded in common law principles articulated in cases such as Hasty v. Rent-A-Driver, Inc. and Allright Auto Parks, Inc. v. Berry. This analysis considers:

• • The existence of a legitimate business interest
  • The reasonableness of time and geographic restrictions
  • The economic hardship imposed on the employee
  • The impact on the public interest

A threshold requirement is the existence of a protectable interest, including:

1. 1. Trade secrets or confidential information
   2. Customer relationships or goodwill
   3. Situations where the employee’s position creates a risk of unfair competition

The new statute does not fully displace that framework but instead overlays it with statutory presumptions that will significantly alter litigation strategy and how the courts enforce these agreements.

Tennessee law distinguishes between two types of noncompetes:

• • Noncompetes which are ancillary to a valid employment agreement
  • Noncompetes which are ancillary to a valid agreement for sale of a business

1. Noncompete Provisions as Part of an Employment Agreement

Under current case law, ordinary competition cannot be restrained. Only unfair competition that would give the former employee or independent contractor an unfair advantage can be restrained. In evaluating a noncompete agreement between an employer and an employee or independent contractor, Tennessee courts examine the overall context of the situation.

Courts have emphasized that while consideration of other factors is pertinent in their reasonableness analysis, “the consideration supporting the agreements, the threatened danger to the employer in the absence of such an agreement; the economic hardship imposed on the employee by such a covenant; and whether or not such a covenant should be inimical to public interest” should always be incorporated into the evaluation to determine the enforceability.  

The threshold question that the courts had to answer was whether the employer had a legitimate business interest that was properly protectable by a noncompetition agreement. The courts identified several protectable interests, such as trade secrets or other confidential information, preventing misuse of customer lists, the perception of entanglement between the employee and the employer’s business, as well as other factors.  If a legitimate business interest in enforcing the covenant not to compete existed and the time restraint and geographic limitations were no broader than necessary to protect said interest, then the covenants not to compete were deemed reasonable and enforced. 

2. Noncompete Provisions as Part of an Agreement to Sell a Business

Noncompetes ancillary to the sale of the business were scrutinized differently. The courts have recognized that covenants not to compete in connection with the sale of a business are often “necessary for the protection of the property purchased,” particularly where substantial consideration is given for the business’s goodwill. Tennessee courts still required the covenant not to compete to be reasonable to be enforced, however. This was determined by examining the nature of the business, the manner in which it had been conducted, and its territorial extent.

The New Law Brings Clarity and New Presumptions to Restrictive Covenant Law

The new legislation removes the uncertainty of enforcement of noncompete restrictions. It establishes a rebuttable presumption of reasonableness for noncompete agreements between employers and former employees or independent contractors when the duration of the restriction is two years or less. This presumption streamlines the judicial evaluation process and provides clearer guidance for both employers and workers.

For noncompete agreements related to the sale of a business, the law offers a similar presumption. Restrictions will be considered reasonable if they last five years or less or match the period during which payments are made to the owner or seller, whichever is longer. The law defines the sale of a business broadly, including asset sales, shares of a corporation, partnership interests, membership interests in limited liability companies, or other equity interests.

The legislation also extends the presumption of reasonableness to restrictive covenants enforced against current or former distributors, dealers, franchisees, lessees, or licensees of trademarks and service marks. Noncompete agreements in these contexts will be seen as reasonable if the restrictions last three years or less from the date the business relationship ends.

The statute creates tiered presumptions depending on the nature of the relationship:

1. Employees and independent contractors

• • A restriction of two years or less is presumed reasonable.

2. Franchise, distributor and similar relationships

• • A restriction of three years or less is presumed reasonable.

3. Sale-of-business context

• • A restriction of five years or less (or tied to payment duration) is presumed reasonable.

Wage Threshold Prohibition (Tenn. Code Ann. § 50‑1‑211)

The statute prohibits noncompetes for employees earning less than $70,000 annually, rendering such agreements void as a matter of public policy. The bill specifies how annual compensation should be calculated, but it includes all forms of remuneration including wages, salary, commissions, nondiscretionary bonuses, with a formula for hourly employees based on a standard 40-hour workweek and 52 weeks per year.

Interaction with Existing Health Care Noncompete Statute (Tenn. Code Ann. § 63‑1‑148)

Tennessee has already codified specific rules governing health care providers. Section 63‑1‑148 provides that a noncompete is deemed reasonable if it meets these factors:

• • It is in writing and signed
  • It is limited to two years and one of the following:
    • • A 10-mile radius or the relevant county
      • A facility-based restriction without geographic limits

Additionally, in the sale-of-practice context, restrictions are presumed reasonable if the duration and geographic scope are reasonable under the circumstances, with a rebuttable presumption favoring enforceability.

It remains an open question whether this law applies to health care providers subject to § 63‑1‑148. The broad language of § 50‑1‑211 (“notwithstanding a law to the contrary”) suggests it does. That being said, health care workers earning less than $70,000 would not be subject to noncompete restrictions.  

Though confidentiality and nondisclosure agreements, as well as non-solicitation agreements, remain unaffected by this legislation, Tennessee has taken a major step toward providing greater certainty in the enforcement of restrictive covenants across the state.

Contact Richard Bennett, Rachel Ducker or any member of the Phelps labor and employment team with questions or for compliance advice.