diff --git a/lib/jekyll/layout_reader.rb b/lib/jekyll/layout_reader.rb
index 1b07c724..66854339 100644
--- a/lib/jekyll/layout_reader.rb
+++ b/lib/jekyll/layout_reader.rb
@@ -14,6 +14,10 @@ module Jekyll
       @layouts
     end
 
+    def layout_directory
+      @layout_directory ||= (layout_directory_in_cwd || layout_directory_inside_source)
+    end
+
     private
 
     def layout_entries
@@ -33,8 +37,19 @@ module Jekyll
       Dir.chdir(directory) { yield }
     end
 
-    def layout_directory
-      File.join(site.source, site.config['layouts'])
+    def layout_directory_inside_source
+      # TODO: Fix for Windows
+      File.join(site.source, File.expand_path(site.config['layouts'], "/"))
+    end
+
+    def layout_directory_in_cwd
+      # TODO: Fix on Windows
+      dir = File.join(Dir.pwd, File.expand_path(site.config['layouts'], '/'))
+      if File.directory?(dir)
+        dir
+      else
+        nil
+      end
     end
   end
 end
diff --git a/test/test_layout_reader.rb b/test/test_layout_reader.rb
index eead655a..ff979c2b 100644
--- a/test/test_layout_reader.rb
+++ b/test/test_layout_reader.rb
@@ -13,5 +13,22 @@ class TestLayoutReader < Test::Unit::TestCase
       layouts = LayoutReader.new(@site).read
       assert_equal ["default", "simple", "post/simple"].sort, layouts.keys.sort
     end
+
+    context "when no _layouts directory exists in CWD" do
+      should "know to use the layout directory relative to the site source" do
+        assert_equal LayoutReader.new(@site).layout_directory, source_dir("_layouts")
+      end
+    end
+
+    context "when a _layouts directory exists in CWD" do
+      setup do
+        stub(File).directory? { true }
+        stub(Dir).pwd { source_dir("blah") }
+      end
+
+      should "know to use the layout directory relative to CWD" do
+        assert_equal LayoutReader.new(@site).layout_directory, source_dir("blah/_layouts")
+      end
+    end
   end
 end