Staff at Kinect Sports developer Rare are under threat of redundancy, Microsoft has confirmed.
A "small number of employees" at the legendary UK studio have been notified that their jobs are at risk, Microsoft said.
"While redundancies are never easy, these organizational changes are part of Rare's ongoing strategy and operational planning which typically coincides with the shipment of a title," Microsoft said in a statement issued to Edge.
"We are working closely with the affected employees to support them through this transition and help them apply for other roles within Microsoft.
Speaking to Edge, sources said the entire 42 person art department at Rare were told their jobs were at risk of redundancy and all affected staff had to apply for 23 managerial jobs at Rare's new Birmingham office.
If true, 19 staff will be let go as Edge points out, the maximum number of redundancies allowed under EU employment law without the need for a full consultation process.
Microsoft, however, countered this claim. "Whilst we're not discussing the exact numbers involved, I can assure you that it's far fewer than you've indicated and represents a small percentage of the total Rare team," the Xbox 360 manufacturer said.
Reports suggest Rare intends to become a studio primarily staffed by contractors. Edge's source said development of the Kinect Sports franchise may be shared between Rare and Kinect Joy Ride maker Big Park.
In October last year Microsoft veteran Scott Henson took over Rare as studio manager. Following his appointment he told Eurogamer Kinect development is the "centrepiece" of Rare's strategy.
"Kinect will be a key part of the studio's future," he said. "I'm not suggesting it's going to be exclusive, but it will be the centrepiece of our strategy for sure, because there is a lot of opportunity there."
Rare's impressive back catalogue of franchises includes Kameo: Elements of Power, Killer Instinct, Banjo-Kazooie, Perfect Dark and Viva Piñata all Microsoft-owned intellectual properties.
In March 2010 Microsoft released a Perfect Dark remake on Xbox Live Arcade with updated graphics.
Kinect launch title Kinect Sports was a commercial success, and is the best-selling Kinect game by far, according to figures from UKIE/GfK Chart Track.
Eurogamer has contacted Microsoft for comment.