While initially Google Docs used a labeling system similar to Gmail, the current version combines the benefits of labels with the simplicity of folders. The interface names them folders, but they're actually hierarchical labels. You can add a document to multiple folders without creating copies. Just go to "all items" and drag the document to more than one folder. Since the sidebar doesn't show subfolders, you can't drag the document to a subfolder. To remove one of the labels — click on the label you want to remove in the sidebar and drag the document to one of the other labels. To remove all the labels, drag the document to "Items not in folders".
Source:→ Google OS