diff --git a/python_files/tests/pytestadapter/.data/config_sub_folder/config/pytest.ini b/python_files/tests/pytestadapter/.data/config_sub_folder/config/pytest.ini
new file mode 100644
index 000000000000..dfac39a723e8
--- /dev/null
+++ b/python_files/tests/pytestadapter/.data/config_sub_folder/config/pytest.ini
@@ -0,0 +1,8 @@
+# Copyright (c) Microsoft Corporation. All rights reserved.
+# Licensed under the MIT License.
+
+[pytest]
+python_files =
+  test_*.py
+testpaths =
+  tests
diff --git a/python_files/tests/pytestadapter/.data/config_sub_folder/tests/test_hello.py b/python_files/tests/pytestadapter/.data/config_sub_folder/tests/test_hello.py
new file mode 100644
index 000000000000..2fd5e2b0a309
--- /dev/null
+++ b/python_files/tests/pytestadapter/.data/config_sub_folder/tests/test_hello.py
@@ -0,0 +1,6 @@
+# Copyright (c) Microsoft Corporation. All rights reserved.
+# Licensed under the MIT License.
+
+
+def test_hello():  # test_marker--test_hello
+    assert True
diff --git a/python_files/tests/pytestadapter/test_discovery.py b/python_files/tests/pytestadapter/test_discovery.py
index e8274bcd9717..e27750dc174c 100644
--- a/python_files/tests/pytestadapter/test_discovery.py
+++ b/python_files/tests/pytestadapter/test_discovery.py
@@ -109,6 +109,10 @@ def test_parameterized_error_collect():
 @pytest.mark.parametrize(
     "file, expected_const",
     [
+        (
+            "test_multi_class_nest.py",
+            expected_discovery_test_output.nested_classes_expected_test_output,
+        ),
         (
             "test_multi_class_nest.py",
             expected_discovery_test_output.nested_classes_expected_test_output,
@@ -178,7 +182,9 @@ def test_pytest_collect(file, expected_const):
     if actual_list is not None:
         actual_item = actual_list.pop(0)
         assert all(item in actual_item.keys() for item in ("status", "cwd", "error"))
-        assert actual_item.get("status") == "success"
+        assert (
+            actual_item.get("status") == "success"
+        ), f"Status is not 'success', error is: {actual_item.get('error')}"
         assert actual_item.get("cwd") == os.fspath(helpers.TEST_DATA_PATH)
         assert is_same_tree(
             actual_item.get("tests"), expected_const
@@ -276,3 +282,30 @@ def test_pytest_config_file():
             actual_item.get("tests"),
             expected_discovery_test_output.root_with_config_expected_output,
         ), f"Tests tree does not match expected value. \n Expected: {json.dumps(expected_discovery_test_output.root_with_config_expected_output, indent=4)}. \n Actual: {json.dumps(actual_item.get('tests'), indent=4)}"
+
+
+def test_config_sub_folder():
+    """Here the session node will be a subfolder of the workspace root and the test are in another subfolder.
+    This tests checks to see if test node path are under the session node and if so the session node is correctly updated to the common path."""
+    folder_path = helpers.TEST_DATA_PATH / "config_sub_folder"
+    actual = helpers.runner_with_cwd(
+        [
+            "--collect-only",
+            "-c=config/pytest.ini",
+            "--rootdir=config/",
+            "-vv",
+        ],
+        folder_path,
+    )
+
+    assert actual
+    actual_list: List[Dict[str, Any]] = actual
+    if actual_list is not None:
+        actual_item = actual_list.pop(0)
+        assert all(item in actual_item.keys() for item in ("status", "cwd", "error"))
+        assert actual_item.get("status") == "success"
+        assert actual_item.get("cwd") == os.fspath(helpers.TEST_DATA_PATH / "config_sub_folder")
+        assert actual_item.get("tests") is not None
+        if actual_item.get("tests") is not None:
+            tests: Any = actual_item.get("tests")
+            assert tests.get("name") == "config_sub_folder"
diff --git a/python_files/vscode_pytest/__init__.py b/python_files/vscode_pytest/__init__.py
index 34ff903e64d9..1d855232cbd8 100644
--- a/python_files/vscode_pytest/__init__.py
+++ b/python_files/vscode_pytest/__init__.py
@@ -509,9 +509,25 @@ def build_test_tree(session: pytest.Session) -> TestNode:
     created_files_folders_dict: Dict[str, TestNode] = {}
     for _, file_node in file_nodes_dict.items():
         # Iterate through all the files that exist and construct them into nested folders.
-        root_folder_node: TestNode = build_nested_folders(
-            file_node, created_files_folders_dict, session
-        )
+        root_folder_node: TestNode
+        try:
+            root_folder_node: TestNode = build_nested_folders(
+                file_node, created_files_folders_dict, session_node
+            )
+        except ValueError:
+            # This exception is raised when the session node is not a parent of the file node.
+            print(
+                "[vscode-pytest]: Session path not a parent of test paths, adjusting session node to common parent."
+            )
+            common_parent = os.path.commonpath([file_node["path"], get_node_path(session)])
+            common_parent_path = pathlib.Path(common_parent)
+            print("[vscode-pytest]: Session node now set to: ", common_parent)
+            session_node["path"] = common_parent_path  # pathlib.Path
+            session_node["id_"] = common_parent  # str
+            session_node["name"] = common_parent_path.name  # str
+            root_folder_node = build_nested_folders(
+                file_node, created_files_folders_dict, session_node
+            )
         # The final folder we get to is the highest folder in the path
         # and therefore we add this as a child to the session.
         root_id = root_folder_node.get("id_")
@@ -524,7 +540,7 @@ def build_test_tree(session: pytest.Session) -> TestNode:
 def build_nested_folders(
     file_node: TestNode,
     created_files_folders_dict: Dict[str, TestNode],
-    session: pytest.Session,
+    session_node: TestNode,
 ) -> TestNode:
     """Takes a file or folder and builds the nested folder structure for it.
 
@@ -534,11 +550,23 @@ def build_nested_folders(
     created_files_folders_dict -- Dictionary of all the folders and files that have been created where the key is the path.
     session -- the pytest session object.
     """
-    prev_folder_node = file_node
+    # check if session node is a parent of the file node, throw error if not.
+    session_node_path = session_node["path"]
+    is_relative = False
+    try:
+        is_relative = file_node["path"].is_relative_to(session_node_path)
+    except AttributeError:
+        is_relative = file_node["path"].relative_to(session_node_path)
+    if not is_relative:
+        # If the session node is not a parent of the file node, we need to find their common parent.
+        raise ValueError("session and file not relative to each other, fixing now....")
 
     # Begin the iterator_path one level above the current file.
+    prev_folder_node = file_node
     iterator_path = file_node["path"].parent
-    while iterator_path != get_node_path(session):
+    counter = 0
+    max_iter = 100
+    while iterator_path != session_node_path:
         curr_folder_name = iterator_path.name
         try:
             curr_folder_node: TestNode = created_files_folders_dict[os.fspath(iterator_path)]
@@ -549,6 +577,15 @@ def build_nested_folders(
             curr_folder_node["children"].append(prev_folder_node)
         iterator_path = iterator_path.parent
         prev_folder_node = curr_folder_node
+        # Handles error where infinite loop occurs.
+        counter += 1
+        if counter > max_iter:
+            raise ValueError(
+                "[vscode-pytest]: Infinite loop occurred in build_nested_folders. iterator_path: ",
+                iterator_path,
+                "session_node_path: ",
+                session_node_path,
+            )
     return prev_folder_node