diff --git a/changelog/1028.bugfix b/changelog/1028.bugfix
new file mode 100644
index 0000000..39bc7a9
--- /dev/null
+++ b/changelog/1028.bugfix
@@ -0,0 +1 @@
+Fix compatiblity issue between `looponfail` and editable installs.
diff --git a/src/xdist/looponfail.py b/src/xdist/looponfail.py
index 7ef24c1..370cb8b 100644
--- a/src/xdist/looponfail.py
+++ b/src/xdist/looponfail.py
@@ -160,7 +160,8 @@ def init_worker_session(channel, args, option_dict):
     newpaths = []
     for p in sys.path:
         if p:
-            if not os.path.isabs(p):
+            # Ignore path placeholders created for editable installs
+            if not os.path.isabs(p) and not p.endswith(".__path_hook__"):
                 p = os.path.abspath(p)
             newpaths.append(p)
     sys.path[:] = newpaths