diff --git a/api/internal/target/kusttarget_configplugin.go b/api/internal/target/kusttarget_configplugin.go
index f05c6584dd..0991c5fac7 100644
--- a/api/internal/target/kusttarget_configplugin.go
+++ b/api/internal/target/kusttarget_configplugin.go
@@ -288,7 +288,7 @@ var transformerConfigurators = map[builtinhelpers.BuiltinPluginType]func(
 			} else {
 				// merge spec/template/metadata fieldSpec if includeTemplate flag is true
 				if label.IncludeTemplates {
-					fss, err = fss.MergeOne(types.FieldSpec{Path: "spec/template/metadata/labels", CreateIfNotPresent: true})
+					fss, err = fss.MergeOne(types.FieldSpec{Path: "spec/template/metadata/labels", CreateIfNotPresent: false})
 					if err != nil {
 						return nil, errors.Wrap(err, "failed to merge template fieldSpec")
 					}
diff --git a/api/krusty/inlinelabels_test.go b/api/krusty/inlinelabels_test.go
index 7e5e4e24f0..2979c27e4f 100644
--- a/api/krusty/inlinelabels_test.go
+++ b/api/krusty/inlinelabels_test.go
@@ -160,66 +160,3 @@ spec:
         foo: bar
 `)
 }
-
-func TestKustomizationLabelsInTemplateWhenLabelsIsNil(t *testing.T) {
-	th := kusttest_test.MakeHarness(t)
-	th.WriteF("app/deployment.yaml", `
-apiVersion: apps/v1
-kind: Deployment
-metadata:
-  name: deployment
-spec:
-  replicas: 1
-  template:
-    spec:
-      containers:
-      - name: test-server
-        image: test-server
-`)
-	th.WriteK("/app", `
-resources:
-- deployment.yaml
-
-commonLabels:
-  app: test-server
-
-labels:
-- pairs:
-    app.kubernetes.io/component: a
-    app.kubernetes.io/instance: b
-    app.kubernetes.io/name: c
-    app.kubernetes.io/part-of: d
-  includeSelectors: false
-  includeTemplates: true
-`)
-	m := th.Run("/app", th.MakeDefaultOptions())
-	th.AssertActualEqualsExpected(m, `
-apiVersion: apps/v1
-kind: Deployment
-metadata:
-  labels:
-    app: test-server
-    app.kubernetes.io/component: a
-    app.kubernetes.io/instance: b
-    app.kubernetes.io/name: c
-    app.kubernetes.io/part-of: d
-  name: deployment
-spec:
-  replicas: 1
-  selector:
-    matchLabels:
-      app: test-server
-  template:
-    metadata:
-      labels:
-        app: test-server
-        app.kubernetes.io/component: a
-        app.kubernetes.io/instance: b
-        app.kubernetes.io/name: c
-        app.kubernetes.io/part-of: d
-    spec:
-      containers:
-      - image: test-server
-        name: test-server
-`)
-}