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Peter Gibbons is a frustrated and unmotivated programmer who works at the Texas-based Initech software company. Unable to stand up to his overcritical girlfriend, Anne, he is in love with local waitress Joanna but is afraid to speak to her. He is friends with co-workers Samir Nagheenanajar (who loathes that no one can ever pronounce his last name correctly) and Michael Bolton (who loathes being associated with the famous singer of the same name). Another co-worker in the office is Milton Waddams, a meek collator who is mostly ignored by the rest of the office except Peter. Also, there is Tom Smykowski, a jaded product manager who is routinely scared of being fired. The staff suffers under top-heavy, callous management, especially from Initech's vice president Bill Lumbergh, whom Peter hates and avoids confronting. Lumbergh takes obvious delight in micromanaging all his staff, particularly Milton and Peter. He makes Milton move his desk constantly, takes his beloved red stapler, and makes him do more and more work, whilst making Peter work almost every weekend.

Anne persuades Peter to attend an occupational hypnotherapy session led by Dr. Swanson. Swanson hypnotizes Peter and tells him to feel relaxed and stop caring about his job until he snaps his fingers. However, Swanson suddenly dies of a heart attack before snapping Peter out of his relaxed state. Peter sleeps soundly through most of the next day, ignoring phone calls from Lumbergh and Anne, who angrily breaks up with him while confirming suspicions that she has been cheating on him.

While a pair of business consultants, Bob Slydell and Bob Porter ("the Bobs"), are brought in to help the company downsize, Peter begins dating Joanna, who shares his loathing of management and love of kung fu movies. She is required to wear "pieces of flair" (buttons allowing employees to "express themselves"). Her boss hassles her for not wearing more than the required minimum.