LGBTQ groups accuse the streaming giant of trampling transgender rights and profiting from hate speech.
About 100 people joined a rally at the company's office-studio complex pre-noon, including an estimated 30 employees who joined in later.
The company issued a statement ahead of the protest saying: "We understand the deep hurt that's been caused" and "respect the decision of any employee who chooses to walk out."
What is the controversy about?
The row centers around Chappelle's special, "The Closer," that has risen high on Netflix's list of most-watched titles.
In the special, the stand-up star insists "gender is a fact" and accuses LGBTQ people of being "too sensitive."
The popular comedian previously has been accused of mocking transgender people.
"I think that trans and nonbinary employees aren't safe as long as their employer is putting out content in the world that could harm them," said Devan McGrath, a Netflix Animation employee who joined the walkout.
Protesters chanted "Trans lives matter" and called for better representation at Netflix.
"I want trans representation on the Netflix board, this f--ing week,'' said Joey Soloway, writer-director and creator of the Emmy-winning comedy "Transparent," at the rally.
'Not a laughing matter'
Ashlee Marie Preston, an activist and the event's organizer, said the rally was intended to highlight more than just the problem with jokes such as the ones made by Chappelle.
"We are here today not because we don't know how to take a joke," she said. "We're here because we're concerned that the jokes are taking lives. It's not a laughing matter.
"If we have companies like Netflix who aren't listening to their employees, who are forcing their employees to participate in their own oppression, that's unacceptable," Preston told The Associated Press. "We're here to keep people accountable. We're not going anywhere."
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The rally received pushback from counterprotesters who also showed up to back Netflix's decision not to pull the special.
While the two sides got involved in some shoving and pushing, the conflict was mostly limited to a war of words.
One of the people who came to support the Hollywood giant was Belissa Cohen, a former journalist.
"We want to show that there isn't unanimous support about transgender ideology when it comes to Netflix viewers," Cohen said.
She and about a dozen other people carried placards that read: "Free speech is a right" and "Truth is not transphobic."