diff --git a/NEXT_CHANGELOG.md b/NEXT_CHANGELOG.md
index 88f45aac96..0d651c92f5 100644
--- a/NEXT_CHANGELOG.md
+++ b/NEXT_CHANGELOG.md
@@ -10,5 +10,6 @@
 
 ### Bundles
 * Add validation that served_models and served_entities are not used at the same time. Add client side translation logic. ([#3880](https://github.com/databricks/cli/pull/3880))
+* Fix handling of `file://` URIs in job libraries: `file://relative/path` uploads local files, while `file:///absolute/path` references runtime container assets. ([#3884](https://github.com/databricks/cli/pull/3884))
 
 ### API Changes
diff --git a/bundle/libraries/local_path.go b/bundle/libraries/local_path.go
index 543c8d2d68..8d5ad67b20 100644
--- a/bundle/libraries/local_path.go
+++ b/bundle/libraries/local_path.go
@@ -24,9 +24,14 @@ import (
 // - s3:/mybucket/myfile.txt
 // - /Users/jane@doe.com/myfile.txt
 func IsLocalPath(p string) bool {
-	// If the path has the explicit file scheme, it's a local path.
+	// If the path has the explicit file scheme, check if it's an absolute path.
+	// file:///absolute/path is a runtime container path (remote).
+	// file://relative/path is a local path to be uploaded.
 	if strings.HasPrefix(p, "file://") {
-		return true
+		// Extract the path after file://
+		pathAfterScheme := strings.TrimPrefix(p, "file://")
+		// If it's an absolute path (starts with /), it's a runtime path, not local
+		return !path.IsAbs(pathAfterScheme)
 	}
 
 	// If the path has another scheme, it's a remote path.
diff --git a/bundle/libraries/local_path_test.go b/bundle/libraries/local_path_test.go
index bca8d7ad9f..9fba31a80f 100644
--- a/bundle/libraries/local_path_test.go
+++ b/bundle/libraries/local_path_test.go
@@ -8,22 +8,31 @@ import (
 )
 
 func TestIsLocalPath(t *testing.T) {
-	// Relative paths, paths with the file scheme, and Windows paths.
+	// Relative paths and Windows paths.
 	assert.True(t, IsLocalPath("some/local/path"))
 	assert.True(t, IsLocalPath("./some/local/path"))
-	assert.True(t, IsLocalPath("file://path/to/package"))
 	assert.True(t, IsLocalPath("C:\\path\\to\\package"))
 	assert.True(t, IsLocalPath("myfile.txt"))
 	assert.True(t, IsLocalPath("./myfile.txt"))
 	assert.True(t, IsLocalPath("../myfile.txt"))
-	assert.True(t, IsLocalPath("file:///foo/bar/myfile.txt"))
 
-	// Absolute paths.
+	// file:// with relative paths (local files to upload).
+	assert.True(t, IsLocalPath("file://path/to/package"))
+	assert.True(t, IsLocalPath("file://foo/bar/myfile.txt"))
+	assert.True(t, IsLocalPath("file://./relative.jar"))
+	assert.True(t, IsLocalPath("file://../lib/package.whl"))
+
+	// Absolute paths without scheme (remote).
 	assert.False(t, IsLocalPath("/some/full/path"))
 	assert.False(t, IsLocalPath("/Workspace/path/to/package"))
 	assert.False(t, IsLocalPath("/Users/path/to/package"))
 
-	// Paths with schemes.
+	// file:/// with absolute paths (runtime container paths - remote).
+	assert.False(t, IsLocalPath("file:///foo/bar/myfile.txt"))
+	assert.False(t, IsLocalPath("file:///opt/spark/jars/driver.jar"))
+	assert.False(t, IsLocalPath("file:///"))
+	assert.False(t, IsLocalPath("file:///absolute/path"))
+	// Paths with other schemes (remote).
 	assert.False(t, IsLocalPath("dbfs://path/to/package"))
 	assert.False(t, IsLocalPath("dbfs:/path/to/package"))
 	assert.False(t, IsLocalPath("s3://path/to/package"))