diff --git a/tests/test_merger_repo.py b/tests/test_merger_repo.py
new file mode 100644
index 0000000000..454f3ccf33
--- /dev/null
+++ b/tests/test_merger_repo.py
@@ -0,0 +1,79 @@
+#!/usr/bin/env python
+
+# Copyright 2012 Hewlett-Packard Development Company, L.P.
+# Copyright 2014 Wikimedia Foundation Inc.
+#
+# Licensed under the Apache License, Version 2.0 (the "License"); you may
+# not use this file except in compliance with the License. You may obtain
+# a copy of the License at
+#
+#      http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS, WITHOUT
+# WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied. See the
+# License for the specific language governing permissions and limitations
+# under the License.
+
+import logging
+import os
+
+import git
+
+from zuul.merger.merger import Repo
+from tests.base import ZuulTestCase
+
+logging.basicConfig(level=logging.DEBUG,
+                    format='%(asctime)s %(name)-32s '
+                    '%(levelname)-8s %(message)s')
+
+
+class TestMergerRepo(ZuulTestCase):
+
+    log = logging.getLogger("zuul.test.merger.repo")
+    workspace_root = None
+
+    def setUp(self):
+        super(TestMergerRepo, self).setUp()
+        self.workspace_root = os.path.join(self.test_root, 'workspace')
+
+    def test_ensure_cloned(self):
+        parent_path = os.path.join(self.upstream_root, 'org/project1')
+
+        # Forge a repo having a submodule
+        parent_repo = git.Repo(parent_path)
+        parent_repo.git.submodule('add', os.path.join(
+            self.upstream_root, 'org/project2'), 'subdir')
+        parent_repo.index.commit('Adding project2 as a submodule in subdir')
+        # git 1.7.8 changed .git from being a directory to a file pointing
+        # to the parent repository /.git/modules/*
+        self.assertTrue(os.path.exists(
+            os.path.join(parent_path, 'subdir', '.git')),
+            msg='.git file in submodule should be a file')
+
+        work_repo = Repo(parent_path, self.workspace_root,
+                         'none@example.org', 'User Name')
+        self.assertTrue(
+            os.path.isdir(os.path.join(self.workspace_root, 'subdir')),
+            msg='Cloned repository has a submodule placeholder directory')
+        self.assertFalse(os.path.exists(
+            os.path.join(self.workspace_root, 'subdir', '.git')),
+            msg='Submodule is not initialized')
+
+        sub_repo = Repo(
+            os.path.join(self.upstream_root, 'org/project2'),
+            os.path.join(self.workspace_root, 'subdir'),
+            'none@example.org', 'User Name')
+        self.assertTrue(os.path.exists(
+            os.path.join(self.workspace_root, 'subdir', '.git')),
+            msg='Cloned over the submodule placeholder')
+
+        self.assertEquals(
+            os.path.join(self.upstream_root, 'org/project1'),
+            work_repo.createRepoObject().remotes[0].url,
+            message="Parent clone still point to upstream project1")
+
+        self.assertEquals(
+            os.path.join(self.upstream_root, 'org/project2'),
+            sub_repo.createRepoObject().remotes[0].url,
+            message="Sub repository points to upstream project2")
diff --git a/zuul/merger/merger.py b/zuul/merger/merger.py
index 8774f109e7..f36b974264 100644
--- a/zuul/merger/merger.py
+++ b/zuul/merger/merger.py
@@ -40,7 +40,7 @@ class Repo(object):
             self.log.exception("Unable to initialize repo for %s" % remote)
 
     def _ensure_cloned(self):
-        repo_is_cloned = os.path.exists(self.local_path)
+        repo_is_cloned = os.path.exists(os.path.join(self.local_path, '.git'))
         if self._initialized and repo_is_cloned:
             return
         # If the repo does not exist, clone the repo.