diff --git a/services/sync/modules/policies.js b/services/sync/modules/policies.js
index 167dd10dce5..d799cb2356f 100644
--- a/services/sync/modules/policies.js
+++ b/services/sync/modules/policies.js
@@ -737,6 +737,12 @@ ErrorHandler.prototype = {
       return true;
     }
 
+    if (Status.login == LOGIN_FAILED_LOGIN_REJECTED) {
+      // An explicit LOGIN_REJECTED state is always reported (bug 1081158)
+      this._log.trace("shouldReportError: true (login was rejected)");
+      return true;
+    }
+
     let lastSync = Svc.Prefs.get("lastSync");
     if (lastSync && ((Date.now() - Date.parse(lastSync)) >
         Svc.Prefs.get("errorhandler.networkFailureReportTimeout") * 1000)) {
diff --git a/services/sync/tests/unit/test_errorhandler.js b/services/sync/tests/unit/test_errorhandler.js
index 4e94fb342bc..c087acc9ff4 100644
--- a/services/sync/tests/unit/test_errorhandler.js
+++ b/services/sync/tests/unit/test_errorhandler.js
@@ -468,6 +468,24 @@ add_identity_test(this, function test_shouldReportError_master_password() {
   yield deferred.promise;
 });
 
+// Test that even if we don't have a cluster URL, a login failure due to
+// authentication errors is always reported.
+add_identity_test(this, function test_shouldReportLoginFailureWithNoCluster() {
+  // Ensure no clusterURL - any error not specific to login should not be reported.
+  Service.serverURL  = "";
+  Service.clusterURL = "";
+
+  // Test explicit "login rejected" state.
+  Status.resetSync();
+  // If we have a LOGIN_REJECTED state, we always report the error.
+  Status.login = LOGIN_FAILED_LOGIN_REJECTED;
+  do_check_true(errorHandler.shouldReportError());
+  // But any other status with a missing clusterURL is treated as a mid-sync
+  // 401 (ie, should be treated as a node reassignment)
+  Status.login = LOGIN_SUCCEEDED;
+  do_check_false(errorHandler.shouldReportError());
+});
+
 // XXX - how to arrange for 'Service.identity.basicPassword = null;' in
 // an fxaccounts environment?
 add_task(function test_login_syncAndReportErrors_non_network_error() {