This paper reports an innovative heterodyne Wollaston laser encoder with common-optical-path (COP) configuration for the measurement of in-plane displacement. The proposed technique combines the design concepts underlying heterodyne interferometry, grating interferometry, and COP configuration. According to the measurement principle, displacement information pertaining to a moving grating can be obtained from variations in the optical phase induced by the grating. Several experiments were performed to evaluate the feasibility and performance of the proposed heterodyne Wollaston laser encoder. Experiment results demonstrate that the proposed method is capable of sensing in-plane displacement to a resolution of 2 nm while maintaining the stability of the system against environmental disturbances.