Does the power supply needs to be isolated from the earth for this circuit?
In my case both the lab supply(V1) and the scope will be earth
  grounded. Am I violating something here?


Yes, you are violating something. More specifically, if you connect the common node of R3 and R4 to ground AND V1 negative terminal is also connected to ground, you create a short circuit and quite possibly a little bit of noxious smoke.