diff --git a/docs/src/test-advanced.md b/docs/src/test-advanced.md
index 5757fe3521..8e1763afa5 100644
--- a/docs/src/test-advanced.md
+++ b/docs/src/test-advanced.md
@@ -120,7 +120,7 @@ In addition to everything from the [`workerInfo`](#workerinfo), the following in
 - `annotations` - [Annotations](./test-annotations.md) that were added to the test.
 - `snapshotSuffix: string` - Suffix used to locate snapshots for the test.
 - `snapshotPath(snapshotName: string)` - Function that returns the full path to a particular snapshot for the test.
-- `outputDir: string` - Absolute path to the output directory for this test run.
+- `outputDir: string` - Path to the output directory for this test run.
 - `outputPath(...pathSegments: string[])` - Function that returns the full path to a particular output artifact for the test.
 
 The following information is accessible after the test body has finished, in fixture teardown:
diff --git a/src/test/loader.ts b/src/test/loader.ts
index 2bce2b68b9..d3e9a67db2 100644
--- a/src/test/loader.ts
+++ b/src/test/loader.ts
@@ -188,11 +188,13 @@ export class Loader {
     let testDir = takeFirst(projectConfig.testDir, rootDir);
     if (!path.isAbsolute(testDir))
       testDir = path.resolve(rootDir, testDir);
-
+    let outputDir = takeFirst(this._configOverrides.outputDir, projectConfig.outputDir, this._config.outputDir, path.resolve(process.cwd(), 'test-results'))
+    if (!path.isAbsolute(outputDir))
+      outputDir = path.resolve(rootDir, outputDir);
     const fullProject: FullProject = {
       define: takeFirst(this._configOverrides.define, projectConfig.define, this._config.define, []),
       expect: takeFirst(this._configOverrides.expect, projectConfig.expect, this._config.expect, undefined),
-      outputDir: takeFirst(this._configOverrides.outputDir, projectConfig.outputDir, this._config.outputDir, path.resolve(process.cwd(), 'test-results')),
+      outputDir,
       repeatEach: takeFirst(this._configOverrides.repeatEach, projectConfig.repeatEach, this._config.repeatEach, 1),
       retries: takeFirst(this._configOverrides.retries, projectConfig.retries, this._config.retries, 0),
       metadata: takeFirst(this._configOverrides.metadata, projectConfig.metadata, this._config.metadata, undefined),
@@ -347,8 +349,6 @@ function validateProject(project: Project, title: string) {
   if ('outputDir' in project && project.outputDir !== undefined) {
     if (typeof project.outputDir !== 'string')
       throw new Error(`${title}.outputDir must be a string`);
-    if (!path.isAbsolute(project.outputDir))
-      throw new Error(`${title}.outputDir must be an absolute path`);
   }
 
   if ('repeatEach' in project && project.repeatEach !== undefined) {
diff --git a/tests/playwright-test/playwright-test-fixtures.ts b/tests/playwright-test/playwright-test-fixtures.ts
index 4b4b6dfc63..c11ef3b832 100644
--- a/tests/playwright-test/playwright-test-fixtures.ts
+++ b/tests/playwright-test/playwright-test-fixtures.ts
@@ -115,6 +115,8 @@ async function runPlaywrightTest(baseDir: string, params: any, env: Env): Promis
       additionalArgs = params[key];
       continue;
     }
+    if (key === 'usesCustomOutputDir')
+      continue;
     for (const value of Array.isArray(params[key]) ? params[key] : [params[key]]) {
       const k = key.startsWith('-') ? key : '--' + key;
       paramList.push(params[key] === true ? `${k}` : `${k}=${value}`);
@@ -123,8 +125,9 @@ async function runPlaywrightTest(baseDir: string, params: any, env: Env): Promis
   const outputDir = path.join(baseDir, 'test-results');
   const reportFile = path.join(outputDir, 'report.json');
   const args = [path.join(__dirname, '..', '..', 'lib', 'cli', 'cli.js'), 'test'];
+  if (!params.usesCustomOutputDir)
+    args.push('--output=' + outputDir)
   args.push(
-      '--output=' + outputDir,
       '--reporter=dot,json',
       '--workers=2',
       ...paramList
diff --git a/tests/playwright-test/test-output-dir.spec.ts b/tests/playwright-test/test-output-dir.spec.ts
index d31ff603af..67a80d4b8d 100644
--- a/tests/playwright-test/test-output-dir.spec.ts
+++ b/tests/playwright-test/test-output-dir.spec.ts
@@ -231,3 +231,21 @@ test('should not remove folders on non-CI', async ({ runInlineTest }, testInfo)
   expect(fs.existsSync(testInfo.outputPath('test-results', 'dir-my-test-test-1-retry1'))).toBe(true);
   expect(fs.existsSync(testInfo.outputPath('test-results', 'dir-my-test-test-1-retry2'))).toBe(true);
 });
+
+
+test('should accept a relative path for outputDir', async ({ runInlineTest }, testInfo) => {
+  const result = await runInlineTest({
+    'my-test.spec.js': `
+      const { test } = pwt;
+      test('test', async ({}, testInfo) => {
+        expect(testInfo.outputDir).toBe(${JSON.stringify(path.join(testInfo.outputDir, './my-output-dir', 'my-test-test'))});
+      });
+    `,
+    'playwright.config.js': `
+    module.exports = { projects: [
+      { outputDir: './my-output-dir' },
+    ] };
+    `,
+  }, {usesCustomOutputDir: true});
+  expect(result.exitCode).toBe(0);
+});