Undead Labs has laid off a "significant number" of employees as it completes its divestiture from Microsoft and becomes an independent, employee-owned studio, the Seattle-based developer confirmed on LinkedIn.

The studio did not disclose exact headcount figures, but it confirmed that some of the affected staff worked on State of Decay 3, the studio's flagship project still in development. The cuts land at the same studio Microsoft signaled it intended to divest earlier this year.

"It's difficult to reach this moment knowing that not everyone who helped get us here gets to make the rest of the journey with us," the studio wrote in its statement. "They are exceptionally talented developers who have poured years into the State of Decay franchise: solving hard problems, looking after one another, and helping shape both this game and this studio."

What changes for State of Decay 3?

Microsoft said Undead Labs regained its independence under terms similar to those granted to Double Fine and Compulsion, two studios that split from Xbox earlier this year with their IP, back catalogs, and runway funding intact. Undead Labs keeps the State of Decay franchise and will now release State of Decay 3 through a new publisher.

One thing does not change: the title remains slated for a day one launch on Xbox Game Pass, preserving Microsoft's subscription footprint in the franchise even after divesting the developer.

How does this fit Microsoft's broader cuts?

The separation follows Microsoft's layoff of 268 workers across its video game division, including significant cuts at Halo Studios. Social media posts from impacted employees indicate additional cuts hit Rare, Treyarch, World's Edge, Activision, and The Coalition.

Undead Labs itself acknowledged the pattern. "There have been far too many announcements like this across the industry, and we hate adding to that list," the statement reads. "These are people we'd hire again in a heartbeat, and we hope the industry takes notice."

What does independence mean operationally?

For the remaining team, the shift to employee ownership and a new publishing partner means restructured revenue and funding arrangements in place of first-party backing. The runway funding model mirrors what Double Fine and Compulsion received, giving the studio a transition window rather than an immediate cash cliff.

The studio framed the departed developers' contributions as permanent: "Their work remains part of Undead Labs and part of State of Decay 3, regardless of where their careers take them next."

Watch for the identity of the new publisher and the size of the cut workforce — neither has been disclosed, and both will shape how State of Decay 3's development timeline holds up under the new structure.