The lawsuit, filed by George Engstrom and John Stockwell in state court in Seattle, says an unnamed Microsoft employee ran up entertainment expenses of more than US$22,000 (RM79,100), including taking potential business partners to South Korean "hostess bars," which often provide sexual services to customers.
Microsoft dismissed the claims and said it would fight the matter in court.
Engstrom and Stockwell say they alerted Microsoft to the outsize expense claims and possible link to prostitution in 2011 and that the company began an investigation. The lawsuit says the unnamed employee admitted to Stockwell that he had taken executives of other companies to hostess bars, but denied that he was expensing any sex services.
During the internal probe, Stockwell says Microsoft's human resources department asked him to drop the issue and raise the employee's performance review. After Stockwell and the company could not agree, the lawsuit says, Microsoft unilaterally raised the employee's performance rating and allowed him to transfer to another division.
The plaintiffs say they were soon moved off a project related to Microsoft's Bing search engine, and their subsequent projects were scaled down or shut down.
Engstrom and Stockwell say they both received performance ratings of '5' - the lowest on Microsoft's scale - in 2013 and the company fired them months later.
The two are suing for lost pay and benefits and damages for emotional distress. A trial is set for March 7, 2016.
"We’ve carefully reviewed this case and found nothing to substantiate the speculation in the complaint or the allegation of retaliation, and we’re confident a court will agree with us," Microsoft said in an e-mailed statement.
"We always encourage employees to raise concerns that they may have, and take such reports seriously.” — Reuters