diff --git a/src/vs/workbench/services/label/common/labelService.ts b/src/vs/workbench/services/label/common/labelService.ts
index f00e56f4499..c3a566e3c3e 100644
--- a/src/vs/workbench/services/label/common/labelService.ts
+++ b/src/vs/workbench/services/label/common/labelService.ts
@@ -12,7 +12,7 @@ import { Extensions as WorkbenchExtensions, IWorkbenchContributionsRegistry, IWo
 import { Registry } from 'vs/platform/registry/common/platform';
 import { IEnvironmentService } from 'vs/platform/environment/common/environment';
 import { IWorkspaceContextService, IWorkspace } from 'vs/platform/workspace/common/workspace';
-import { isEqual, basenameOrAuthority, basename, joinPath, dirname } from 'vs/base/common/resources';
+import { basenameOrAuthority, basename, joinPath, dirname } from 'vs/base/common/resources';
 import { tildify, getPathLabel } from 'vs/base/common/labels';
 import { IWorkspaceIdentifier, ISingleFolderWorkspaceIdentifier, isSingleFolderWorkspaceIdentifier, WORKSPACE_EXTENSION, toWorkspaceIdentifier, isWorkspaceIdentifier, isUntitledWorkspace } from 'vs/platform/workspaces/common/workspaces';
 import { ILabelService, ResourceLabelFormatter, ResourceLabelFormatting, IFormatterChangeEvent } from 'vs/platform/label/common/label';
@@ -141,21 +141,18 @@ export class LabelService extends Disposable implements ILabelService {
 		const baseResource = this.contextService?.getWorkspaceFolder(resource);
 
 		if (options.relative && baseResource) {
-			const rootName = baseResource?.name ?? basenameOrAuthority(baseResource.uri);
+			const baseResourceLabel = this.formatUri(baseResource.uri, formatting, options.noPrefix);
+			let relativeLabel = this.formatUri(resource, formatting, options.noPrefix);
 
-			let relativeLabel: string;
-			if (isEqual(baseResource.uri, resource)) {
-				relativeLabel = ''; // no label if resources are identical
-			} else {
-				const baseResourceLabel = this.formatUri(baseResource.uri, formatting, options.noPrefix);
-				relativeLabel = this.formatUri(resource, formatting, options.noPrefix).substring(baseResourceLabel.lastIndexOf(formatting.separator) + 1);
-				if (relativeLabel.startsWith(rootName)) {
-					relativeLabel = relativeLabel.substring(rootName.length + (relativeLabel[rootName.length] === formatting.separator ? 1 : 0));
-				}
+			let overlap = 0;
+			while (relativeLabel[overlap] && relativeLabel[overlap] === baseResourceLabel[overlap]) { overlap++; }
+			if (!relativeLabel[overlap] || relativeLabel[overlap] === formatting.separator) {
+				relativeLabel = relativeLabel.substring(1 + overlap);
 			}
 
 			const hasMultipleRoots = this.contextService.getWorkspace().folders.length > 1;
 			if (hasMultipleRoots && !options.noPrefix) {
+				const rootName = baseResource?.name ?? basenameOrAuthority(baseResource.uri);
 				relativeLabel = relativeLabel ? (rootName + ' • ' + relativeLabel) : rootName; // always show root basename if there are multiple
 			}
 
diff --git a/src/vs/workbench/services/label/test/browser/label.test.ts b/src/vs/workbench/services/label/test/browser/label.test.ts
index 89b38e9cd1d..f5d8ff1ab39 100644
--- a/src/vs/workbench/services/label/test/browser/label.test.ts
+++ b/src/vs/workbench/services/label/test/browser/label.test.ts
@@ -3,14 +3,15 @@
  *  Licensed under the MIT License. See License.txt in the project root for license information.
  *--------------------------------------------------------------------------------------------*/
 
+import * as resources from 'vs/base/common/resources';
 import * as assert from 'assert';
 import { TestEnvironmentService, TestPathService } from 'vs/workbench/test/browser/workbenchTestServices';
 import { URI } from 'vs/base/common/uri';
 import { LabelService } from 'vs/workbench/services/label/common/labelService';
 import { TestContextService } from 'vs/workbench/test/common/workbenchTestServices';
+import { Workspace, WorkspaceFolder } from 'vs/platform/workspace/common/workspace';
 
 suite('URI Label', () => {
-
 	let labelService: LabelService;
 
 	setup(() => {
@@ -156,3 +157,75 @@ suite('URI Label', () => {
 		assert.equal(labelService.getUriLabel(uri1, { relative: false }), 'LABEL: /END');
 	});
 });
+
+
+suite('multi-root worksapce', () => {
+	let labelService: LabelService;
+
+	setup(() => {
+		const sources = URI.file('folder1/src');
+		const tests = URI.file('folder1/test');
+		const other = URI.file('folder2');
+
+		labelService = new LabelService(
+			TestEnvironmentService,
+			new TestContextService(
+				new Workspace('test-workspaace', [
+					new WorkspaceFolder({ uri: sources, index: 0, name: 'Sources' }, { uri: sources.toString() }),
+					new WorkspaceFolder({ uri: tests, index: 1, name: 'Tests' }, { uri: tests.toString() }),
+					new WorkspaceFolder({ uri: other, index: 2, name: resources.basename(other) }, { uri: other.toString() }),
+				])),
+			new TestPathService());
+	});
+
+	test('labels of files in multiroot workspaces are the foldername folloed by offset from the folder', () => {
+		labelService.registerFormatter({
+			scheme: 'file',
+			formatting: {
+				label: '${authority}${path}',
+				separator: '/',
+				tildify: false,
+				normalizeDriveLetter: false,
+				authorityPrefix: '//',
+				workspaceSuffix: ''
+			}
+		});
+
+		const tests = {
+			'folder1/src/file': 'Sources • file',
+			'folder1/src/folder/file': 'Sources • folder/file',
+			'folder1/src': 'Sources',
+			'folder1/other': '/folder1/other',
+			'folder2/other': 'folder2 • other',
+		};
+
+		Object.entries(tests).forEach(([path, label]) => {
+			const generated = labelService.getUriLabel(URI.file(path), { relative: true });
+			assert.equal(generated, label);
+		});
+	});
+
+	test('labels with context after path', () => {
+		labelService.registerFormatter({
+			scheme: 'file',
+			formatting: {
+				label: '${path} (${scheme})',
+				separator: '/',
+			}
+		});
+
+		const tests = {
+			'folder1/src/file': 'Sources • file (file)',
+			'folder1/src/folder/file': 'Sources • folder/file (file)',
+			'folder1/src': 'Sources',
+			'folder1/other': '/folder1/other (file)',
+			'folder2/other': 'folder2 • other (file)',
+		};
+
+		Object.entries(tests).forEach(([path, label]) => {
+			const generated = labelService.getUriLabel(URI.file(path), { relative: true });
+			assert.equal(generated, label, path);
+		});
+
+	});
+});