Tennessee employers will soon face new limits on when, and for whom, they can use non-compete agreements. Employees earning less than $70,000 annually can no longer be bound by a non-compete, creating new exposure for companies that rely on junior sales staff, account managers, or other relationship-driven roles.
For many employers, this change creates a gap in protection at a critical stage when employees are building customer relationships but cannot yet be restricted from taking those relationships to a competitor. Southern states have traditionally been considered hospitable to employers, due in part to the continued enforceability of non-compete agreements. Although Tennessee courts describe non-competes as "disfavored," they routinely enforce them where the restrictions are reasonable in duration, geographic scope, and supported by a legitimate business interest.
What Has Changed?
The statute introduces two key limitations on non-compete agreements, but only one is likely to meaningfully affect most employers.
- Compensation threshold: The more consequential change is the statute's compensation threshold. Employers will no longer be permitted to impose non-competes on employees earning less than $70,000 annually, inclusive of wages, salary, commissions, and nondiscretionary bonuses. The statute also prescribes a formula for determining annual compensation, which multiplies the employee's hourly rate by 40 hours per week and 52 weeks per year.
This threshold will have a practical impact, particularly for employers with commission-based sales roles. Many less-seasoned sales employees may fall below the $70,000 mark even when commissions are considered. As a result, employers will need to carefully evaluate the risk of exposing key customer relationships to employees who, at least until their earnings exceed the threshold, cannot be bound by a non-compete and may depart for a competitor with those relationships in hand.
- Duration presumption: This presumption states that a non-compete agreement exceeding two years is unreasonable. In practice, this is unlikely to disrupt most employers, many of whom already limit non-competes to two years or less. The statute does permit longer durations in certain contexts, including franchise, distributorship, and business sale arrangements.
The law is expected to take effect July 1, 2026, pending Governor Lee's signature. It will apply prospectively to agreements entered into, renewed, or amended on or after that date; it does not apply retroactively to existing agreements.
Who Will Be Most Impacted?
This change will disproportionately impact employers who rely on employees that develop customer relationships before reaching higher compensation levels. Examples of these employees include:
- Commission-based teams
- Junior or mid-level account managers
- Customer-facing roles in manufacturing, distribution, and services
- Employees with access to confidential pricing or customer data
What Should Employers Do Now?
Employers can take several steps now to mitigate risk before the law takes effect, including:
- Update existing non-compete agreement templates: confirm that employee and independent contractor agreements do not exceed two years in duration or apply to employees earning less than $70,000 annually.
- Evaluate compensation structures: Identify positions that fall below the threshold but involve protectable customer relationships or confidential information. Where appropriate, consider whether compensation adjustments are warranted.
- Act before July 1, 2026: Employers considering implementing non-competes or those that have delayed updating their agreements should work with counsel now to put compliant agreements in place before the anticipated July 1 effective date.
- Leverage alternative protections: Nondisclosure and customer non-solicitation covenants remain enforceable and should be deployed strategically, particularly for employees who fall below the statutory threshold.
While this legislation creates new restraints on Tennessee employers, it is materially less restrictive than earlier versions of the bill, which would have prohibited non-competes altogether. The new law will require Tennessee employers to rethink how they protect customer relationships, particularly at the early stages of employee development. Viewed in that context, the final statute, while limiting, preserves meaningful tools for protecting legitimate business interests.
If you have questions about how the new non-compete agreement restrictions in Tennessee may impact your business, please contact Martha L. Boyd or another member of Baker Donelson's Labor & Employment Group.