diff --git a/codeflash/languages/javascript/vitest_runner.py b/codeflash/languages/javascript/vitest_runner.py
index 7c5e11c46..021da6e5c 100644
--- a/codeflash/languages/javascript/vitest_runner.py
+++ b/codeflash/languages/javascript/vitest_runner.py
@@ -170,8 +170,24 @@ def _is_vitest_workspace(project_root: Path) -> bool:
 
     try:
         content = vitest_config.read_text()
-        # Check for workspace indicators
-        return "workspace" in content.lower() or "defineWorkspace" in content
+        # Check for actual workspace configuration patterns (not just the word "workspace" in comments)
+        # Valid indicators:
+        #   - defineWorkspace() function call
+        #   - workspace: [ array config
+        #   - separate vitest.workspace.ts/js file
+        import re
+        # Match defineWorkspace calls or workspace: property assignments
+        workspace_pattern = re.compile(
+            r'(?:^|[^a-zA-Z_])defineWorkspace\s*\(|'  # defineWorkspace( function call
+            r'(?:^|[^a-zA-Z_])workspace\s*:\s*\[',     # workspace: [ array
+            re.MULTILINE
+        )
+        if workspace_pattern.search(content):
+            return True
+        # Also check for separate workspace config file
+        if (project_root / "vitest.workspace.ts").exists() or (project_root / "vitest.workspace.js").exists():
+            return True
+        return False
     except Exception:
         return False
 
@@ -238,6 +254,11 @@ def _ensure_codeflash_vitest_config(project_root: Path) -> Path | None:
     include: ['**/*.test.ts', '**/*.test.js', '**/*.test.tsx', '**/*.test.jsx'],
     // Use forks pool so timing markers from process.stdout.write flow to parent stdout
     pool: 'forks',
+    // Disable setupFiles to prevent relative path resolution issues in nested directories.
+    // Project setupFiles often use relative paths (e.g., "test/setup.ts") which resolve
+    // incorrectly when tests are in subdirectories (e.g., extensions/discord/test/).
+    // Codeflash-generated tests are self-contained and don't require project setup files.
+    setupFiles: [],
   }},
 }});
 """
diff --git a/tests/languages/javascript/test_vitest_setupfiles_fix.py b/tests/languages/javascript/test_vitest_setupfiles_fix.py
new file mode 100644
index 000000000..14349d4c3
--- /dev/null
+++ b/tests/languages/javascript/test_vitest_setupfiles_fix.py
@@ -0,0 +1,97 @@
+"""Test that Codeflash Vitest config properly handles setupFiles from project config.
+
+This test verifies that when creating a custom Vitest config, setupFiles paths
+are converted to absolute paths or cleared to prevent resolution issues in nested directories.
+"""
+
+from pathlib import Path
+import tempfile
+import pytest
+
+
+def test_codeflash_vitest_config_overrides_setupfiles():
+    """Test that generated config overrides setupFiles to prevent path resolution issues.
+
+    When a project has setupFiles with relative paths, and Codeflash generates tests
+    for functions in nested directories, those relative paths will resolve incorrectly.
+
+    The fix: Convert setupFiles paths to absolute, or disable them for generated tests.
+    """
+    from codeflash.languages.javascript.vitest_runner import _ensure_codeflash_vitest_config
+
+    with tempfile.TemporaryDirectory() as tmpdir:
+        project_root = Path(tmpdir)
+
+        # Create a project with setup file
+        (project_root / "test").mkdir()
+        setup_file = project_root / "test" / "setup.ts"
+        setup_file.write_text("// Setup file\n")
+
+        # Create vitest config with relative setupFiles path
+        vitest_config = """import { defineConfig } from 'vitest/config';
+
+export default defineConfig({
+  test: {
+    setupFiles: ["test/setup.ts"],  // Relative path - will cause issues
+    include: ["src/**/*.test.ts"],
+  },
+});
+"""
+        (project_root / "vitest.config.ts").write_text(vitest_config)
+
+        # Call the function to create Codeflash config
+        codeflash_config_path = _ensure_codeflash_vitest_config(project_root)
+
+        # Verify the config was created
+        assert codeflash_config_path is not None
+        assert codeflash_config_path.exists()
+
+        # Read the generated config
+        config_content = codeflash_config_path.read_text()
+
+        # The config should either:
+        # 1. Set setupFiles to an empty array (disable setup files for generated tests)
+        # 2. OR convert the path to absolute using project root resolution
+
+        # Check that setupFiles is mentioned and handled in the merge
+        assert "setupFiles" in config_content, (
+            "Generated config must explicitly handle setupFiles to prevent "
+            "relative path resolution issues. Current config:\n" + config_content
+        )
+
+        # The config should set setupFiles to [] or to absolute paths
+        # This prevents the relative path from being resolved incorrectly
+        assert ("setupFiles: []" in config_content or
+                "setupFiles:" in config_content), (
+            "setupFiles must be explicitly set in the merged config"
+        )
+
+
+def test_codeflash_vitest_config_without_setupfiles():
+    """Test that configs without setupFiles still work correctly."""
+    from codeflash.languages.javascript.vitest_runner import _ensure_codeflash_vitest_config
+
+    with tempfile.TemporaryDirectory() as tmpdir:
+        project_root = Path(tmpdir)
+
+        # Create vitest config WITHOUT setupFiles
+        vitest_config = """import { defineConfig } from 'vitest/config';
+
+export default defineConfig({
+  test: {
+    include: ["src/**/*.test.ts"],
+  },
+});
+"""
+        (project_root / "vitest.config.ts").write_text(vitest_config)
+
+        # Call the function to create Codeflash config
+        codeflash_config_path = _ensure_codeflash_vitest_config(project_root)
+
+        # Verify the config was created
+        assert codeflash_config_path is not None
+        assert codeflash_config_path.exists()
+
+        # Config should be created successfully
+        config_content = codeflash_config_path.read_text()
+        assert "mergeConfig" in config_content or "defineConfig" in config_content