diff --git a/news/760.update.rst b/news/760.update.rst
new file mode 100644
index 000000000..1786fde14
--- /dev/null
+++ b/news/760.update.rst
@@ -0,0 +1,8 @@
+Update ``hydra`` hook to include work-around for ``hydra``'s plugin
+manager, which under python < 3.10 (still) uses deprecated PEP-302
+that was removed from PyInstaller's ``PyiFrozenImporter`` in
+PyInstaller 5.8. When building using python < 3.10 and PyInstaller >= 5.8,
+the modules collected from ``hydra._internal.core_plugins`` and
+``hydra_plugins`` packages are now collected as source .py files only;
+this way, they are handled by built-in python's finder/importer instead
+of PyInstaller's ``PyiFrozenImporter``.
diff --git a/src/_pyinstaller_hooks_contrib/hooks/stdhooks/hook-hydra.py b/src/_pyinstaller_hooks_contrib/hooks/stdhooks/hook-hydra.py
index 58e7673fb..0c6197788 100644
--- a/src/_pyinstaller_hooks_contrib/hooks/stdhooks/hook-hydra.py
+++ b/src/_pyinstaller_hooks_contrib/hooks/stdhooks/hook-hydra.py
@@ -10,10 +10,27 @@
 # SPDX-License-Identifier: GPL-2.0-or-later
 # ------------------------------------------------------------------
 
-from PyInstaller.utils.hooks import collect_submodules, collect_data_files
+from PyInstaller.compat import is_py310
+from PyInstaller.utils.hooks import collect_submodules, collect_data_files, is_module_satisfies
 
 # Collect core plugins.
 hiddenimports = collect_submodules('hydra._internal.core_plugins')
 
+# Hydra's plugin manager (`hydra.core.plugins.Plugins`) uses PEP-302 `find_module` / `load_module`, which has been
+# deprecated since python 3.4, and has been removed from PyInstaller's frozen importer in PyInstaller 5.8. For python
+# 3.10 and newer, they implemented new codepath that uses `find_spec`, but for earlier python versions, they opted to
+# keep using the old codepath.
+#
+# See: https://github.com/facebookresearch/hydra/pull/2531
+#
+# To work around the incompatibility with PyInstaller >= 5.8 when using python < 3.10, force collection of plugins as
+# source .py files. This way, they end up handled by python's built-in finder/importer instead of PyInstaller's
+# frozen importer.
+if not is_py310 and is_module_satisfies("PyInstaller >= 5.8"):
+    module_collection_mode = {
+        'hydra._internal.core_plugins': 'py',
+        'hydra_plugins': 'py',
+    }
+
 # Collect package's data files, such as default configuration files.
 datas = collect_data_files('hydra')
diff --git a/src/_pyinstaller_hooks_contrib/tests/test_libraries.py b/src/_pyinstaller_hooks_contrib/tests/test_libraries.py
index e37768440..4f746b624 100644
--- a/src/_pyinstaller_hooks_contrib/tests/test_libraries.py
+++ b/src/_pyinstaller_hooks_contrib/tests/test_libraries.py
@@ -1309,11 +1309,7 @@ def test_pyqtgraph_remote_graphics_view(pyi_builder):
     )
 
 
-# Remove xfail once facebookresearch/hydra#2531 is merged.
 @importorskip('hydra')
-@xfail(
-    is_module_satisfies('PyInstaller >= 5.8'),
-    reason="uses deprecated PEP-302 functionality that was removed from PyInstaller's FrozenImporter.")
 def test_hydra(pyi_builder, tmpdir):
     config_file = str((Path(__file__) / '../data/test_hydra/config.yaml').resolve(strict=True).as_posix())