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May 19, 2026
On May 7, 2026, Tennessee Governor Bill Lee signed into law House Bill 1034, introducing significant changes to the enforceability of non-compete agreements in the state. This new legislation, effective July 1, 2026, reflects a growing trend among states to impose stricter limitations on restrictive covenants. While the law does not eliminate non-compete agreements entirely, it establishes new parameters that employers must carefully navigate to ensure compliance and maintain enforceable agreements.
1. Compensation Threshold for Non-Compete Agreements
One of the most notable changes under HB 1034 is the introduction of a compensation floor. Employers are prohibited from requiring, requesting, or enforcing non-compete agreements against employees earning less than $70,000 in annualized compensation. The statute defines “annualized compensation” to include “total…wages, salary, commissions, nondiscretionary bonuses, and other forms of remuneration, calculated on an annualized basis.” For hourly employees, annualized compensation is calculated by multiplying the hourly rate by 40 hours per week and 52 weeks per year.
2. Presumptions Regarding Temporal Scope
The new law retains the concept of presumptively reasonable restrictions, providing employers with guidance on acceptable temporal limitations. For example, in the employer-employee context, courts “shall presume to be reasonable in time” post-employment restrictions of two years or less. Though restrictions beyond two years are presumed unreasonable, a court may blue pencil a restrictive covenant – i.e., “modify a restrictive covenant . . . to render it reasonable and enforceable.”
Up to five years is presumed reasonable in the sale-of-business context, provided the restrictive covenant is “a material part” of the deal. For franchisee, dealer, property-lease, and trademark-license relationships, three-year restrictions is presumed reasonable.
3. Preservation of Alternative Restrictive Covenants
While HB 1034 imposes meaningful constraints on non-compete agreements, it explicitly preserves the enforceability of other restrictive covenants, such as confidentiality agreements, client or customer non-solicitation agreements, and employee non-solicitation provisions. These tools remain critical for employers seeking to protect their business interests, particularly in light of the new limitations on non-competes.
4. No Retroactive Effect
Importantly, the legislation does not retroactively affect existing non-compete agreements that are not renewed or amended after the law’s effective date. However, employers should review their current agreements to ensure compliance with the new framework moving forward.
To adapt to the new legal landscape, employers should take the following steps:
The author of this article, Patricia Tsipras, is a member of the Bar of Pennsylvania. This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in Pennsylvania, Tennessee, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
