diff --git a/src/vs/workbench/api/browser/mainThreadCustomEditors.ts b/src/vs/workbench/api/browser/mainThreadCustomEditors.ts
index 3016f3a0111..2489c0b5bc8 100644
--- a/src/vs/workbench/api/browser/mainThreadCustomEditors.ts
+++ b/src/vs/workbench/api/browser/mainThreadCustomEditors.ts
@@ -16,7 +16,7 @@ import { URI, UriComponents } from 'vs/base/common/uri';
 import * as modes from 'vs/editor/common/modes';
 import { localize } from 'vs/nls';
 import { IFileDialogService } from 'vs/platform/dialogs/common/dialogs';
-import { FileChangesEvent, FileChangeType, IFileService } from 'vs/platform/files/common/files';
+import { FileChangesEvent, FileChangeType, FileSystemProviderCapabilities, IFileService } from 'vs/platform/files/common/files';
 import { IInstantiationService } from 'vs/platform/instantiation/common/instantiation';
 import { ILabelService } from 'vs/platform/label/common/label';
 import { IUndoRedoService, UndoRedoElementType } from 'vs/platform/undoRedo/common/undoRedo';
@@ -451,8 +451,12 @@ class MainThreadCustomEditorModel extends Disposable implements ICustomEditorMod
 		}
 	}
 
-	public isReadonly() {
-		return !this._editable;
+	public isEditable(): boolean {
+		return this._editable;
+	}
+
+	public isOnReadonlyFileSystem(): boolean {
+		return this._fileService.hasCapability(this.editorResource, FileSystemProviderCapabilities.Readonly);
 	}
 
 	public get viewType() {
diff --git a/src/vs/workbench/contrib/customEditor/browser/customEditorInput.ts b/src/vs/workbench/contrib/customEditor/browser/customEditorInput.ts
index b305b6c280f..bddf88a1207 100644
--- a/src/vs/workbench/contrib/customEditor/browser/customEditorInput.ts
+++ b/src/vs/workbench/contrib/customEditor/browser/customEditorInput.ts
@@ -103,13 +103,20 @@ export class CustomEditorInput extends LazilyResolvedWebviewEditorInput {
 	}
 
 	private decorateLabel(label: string): string {
-		const orphaned = this._modelRef?.object.isOrphaned();
-		const readonly = this.isReadonly();
-		return decorateFileEditorLabel(label, { orphaned: !!orphaned, readonly });
+		const orphaned = !!this._modelRef?.object.isOrphaned();
+
+		const readonly = this._modelRef
+			? !this._modelRef.object.isEditable() || this._modelRef.object.isOnReadonlyFileSystem()
+			: false;
+
+		return decorateFileEditorLabel(label, {
+			orphaned,
+			readonly
+		});
 	}
 
 	public isReadonly(): boolean {
-		return this._modelRef ? this._modelRef.object.isReadonly() : false;
+		return this._modelRef ? !this._modelRef.object.isEditable() : false;
 	}
 
 	public isUntitled(): boolean {
diff --git a/src/vs/workbench/contrib/customEditor/common/customEditor.ts b/src/vs/workbench/contrib/customEditor/common/customEditor.ts
index 5f7fc9d4ce0..6bb68a6a56a 100644
--- a/src/vs/workbench/contrib/customEditor/common/customEditor.ts
+++ b/src/vs/workbench/contrib/customEditor/common/customEditor.ts
@@ -63,7 +63,8 @@ export interface ICustomEditorModel extends IDisposable {
 	readonly resource: URI;
 	readonly backupId: string | undefined;
 
-	isReadonly(): boolean;
+	isEditable(): boolean;
+	isOnReadonlyFileSystem(): boolean;
 
 	isOrphaned(): boolean;
 	readonly onDidChangeOrphaned: Event<void>;
diff --git a/src/vs/workbench/contrib/customEditor/common/customTextEditorModel.ts b/src/vs/workbench/contrib/customEditor/common/customTextEditorModel.ts
index eff8a252954..c39fa2ce52c 100644
--- a/src/vs/workbench/contrib/customEditor/common/customTextEditorModel.ts
+++ b/src/vs/workbench/contrib/customEditor/common/customTextEditorModel.ts
@@ -8,10 +8,11 @@ import { Disposable, IReference } from 'vs/base/common/lifecycle';
 import { isEqual } from 'vs/base/common/resources';
 import { URI } from 'vs/base/common/uri';
 import { IResolvedTextEditorModel, ITextModelService } from 'vs/editor/common/services/resolverService';
+import { FileSystemProviderCapabilities, IFileService } from 'vs/platform/files/common/files';
+import { IInstantiationService } from 'vs/platform/instantiation/common/instantiation';
 import { IRevertOptions, ISaveOptions } from 'vs/workbench/common/editor';
 import { ICustomEditorModel } from 'vs/workbench/contrib/customEditor/common/customEditor';
 import { ITextFileEditorModel, ITextFileService, TextFileEditorModelState } from 'vs/workbench/services/textfile/common/textfiles';
-import { IInstantiationService } from 'vs/platform/instantiation/common/instantiation';
 
 export class CustomTextEditorModel extends Disposable implements ICustomEditorModel {
 
@@ -22,9 +23,8 @@ export class CustomTextEditorModel extends Disposable implements ICustomEditorMo
 	): Promise<CustomTextEditorModel> {
 		return instantiationService.invokeFunction(async accessor => {
 			const textModelResolverService = accessor.get(ITextModelService);
-			const textFileService = accessor.get(ITextFileService);
 			const model = await textModelResolverService.createModelReference(resource);
-			return new CustomTextEditorModel(viewType, resource, model, textFileService);
+			return instantiationService.createInstance(CustomTextEditorModel, viewType, resource, model);
 		});
 	}
 
@@ -33,11 +33,12 @@ export class CustomTextEditorModel extends Disposable implements ICustomEditorMo
 	private readonly _onDidChangeOrphaned = this._register(new Emitter<void>());
 	public readonly onDidChangeOrphaned = this._onDidChangeOrphaned.event;
 
-	private constructor(
+	constructor(
 		public readonly viewType: string,
 		private readonly _resource: URI,
 		private readonly _model: IReference<IResolvedTextEditorModel>,
 		@ITextFileService private readonly textFileService: ITextFileService,
+		@IFileService private readonly _fileService: IFileService,
 	) {
 		super();
 
@@ -60,8 +61,12 @@ export class CustomTextEditorModel extends Disposable implements ICustomEditorMo
 		return this._resource;
 	}
 
-	public isReadonly(): boolean {
-		return this._model.object.isReadonly();
+	public isEditable(): boolean {
+		return !this._model.object.isReadonly();
+	}
+
+	public isOnReadonlyFileSystem(): boolean {
+		return this._fileService.hasCapability(this._resource, FileSystemProviderCapabilities.Readonly);
 	}
 
 	public get backupId() {