diff --git a/application/ui/src/features/annotator/annotations/annotation-labels.component.test.tsx b/application/ui/src/features/annotator/annotations/annotation-labels.component.test.tsx
new file mode 100644
index 0000000000..d6f7909d9e
--- /dev/null
+++ b/application/ui/src/features/annotator/annotations/annotation-labels.component.test.tsx
@@ -0,0 +1,136 @@
+// Copyright (C) 2025 Intel Corporation
+// SPDX-License-Identifier: Apache-2.0
+
+import { getMockedLabel } from 'mocks/mock-labels';
+import { fireEvent, render, screen } from 'test-utils/render';
+import { describe, expect, it, vi } from 'vitest';
+
+import { Label } from '../types';
+import { AnnotationLabels } from './annotation-labels.component';
+
+const mockZoom = { scale: 1, maxZoomIn: 10, hasAnimation: false, translate: { x: 0, y: 0 } };
+
+vi.mock('src/components/zoom/zoom.provider', () => ({
+    useZoom: () => mockZoom,
+}));
+
+describe('AnnotationLabels', () => {
+    const mockOnRemove = vi.fn();
+
+    afterEach(() => {
+        mockOnRemove.mockClear();
+    });
+
+    it('renders placeholder when no labels provided', () => {
+        render(
+            <svg>
+                <AnnotationLabels labels={[]} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        expect(screen.getByText('No label')).toBeInTheDocument();
+    });
+
+    it('renders single label with name and color', () => {
+        const label = getMockedLabel({ name: 'Person', color: '#FF0000' });
+
+        render(
+            <svg>
+                <AnnotationLabels labels={[label]} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        expect(screen.getByText('Person')).toBeInTheDocument();
+
+        const rect = screen.getByLabelText('label Person background');
+        expect(rect).toHaveAttribute('fill', '#FF0000');
+    });
+
+    it('renders multiple labels horizontally', () => {
+        const labels: Label[] = [
+            getMockedLabel({ id: '1', name: 'Person', color: '#FF0000' }),
+            getMockedLabel({ id: '2', name: 'Car', color: '#00FF00' }),
+        ];
+
+        render(
+            <svg>
+                <AnnotationLabels labels={labels} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        expect(screen.getByText('Person')).toBeInTheDocument();
+        expect(screen.getByText('Car')).toBeInTheDocument();
+    });
+
+    it('calls onRemove when close button clicked', () => {
+        const label = getMockedLabel({ id: 'label-1', name: 'Person' });
+
+        render(
+            <svg>
+                <AnnotationLabels labels={[label]} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        const closeButton = screen.getByLabelText('Remove Person');
+        fireEvent.pointerDown(closeButton);
+
+        expect(mockOnRemove).toHaveBeenCalledTimes(1);
+        expect(mockOnRemove).toHaveBeenCalledWith('label-1');
+    });
+
+    it('adjusts sizes based on zoom scale', () => {
+        mockZoom.scale = 2;
+        const label = getMockedLabel({ name: 'Person' });
+
+        render(
+            <svg>
+                <AnnotationLabels labels={[label]} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        const text = screen.getByLabelText('label Person');
+
+        // Font size should be 14 / 2 = 7
+        expect(text).toHaveAttribute('font-size', '7');
+    });
+
+    it('prevents event propagation on close button click', () => {
+        const label = getMockedLabel({ id: 'label-1', name: 'Person' });
+        const mockParentHandler = vi.fn();
+
+        render(
+            <svg onPointerDown={mockParentHandler}>
+                <AnnotationLabels labels={[label]} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        const closeButton = screen.getByLabelText('Remove Person');
+        fireEvent.pointerDown(closeButton);
+
+        expect(mockOnRemove).toHaveBeenCalled();
+        // Parent handler should not be called due to stopPropagation
+        expect(mockParentHandler).not.toHaveBeenCalled();
+    });
+
+    it('renders labels with correct positioning (no overlap)', () => {
+        const labels: Label[] = [
+            getMockedLabel({ id: '1', name: 'A', color: '#FF0000' }),
+            getMockedLabel({ id: '2', name: 'B', color: '#00FF00' }),
+        ];
+
+        render(
+            <svg>
+                <AnnotationLabels labels={labels} onRemove={mockOnRemove} />
+            </svg>
+        );
+
+        const firstRect = screen.getByLabelText('label A background');
+        const secondRect = screen.getByLabelText('label B background');
+
+        const firstX = parseFloat(firstRect.getAttribute('x') || '0');
+        const secondX = parseFloat(secondRect.getAttribute('x') || '0');
+
+        // Second label should be positioned after the first
+        expect(secondX).toBeGreaterThan(firstX);
+    });
+});
diff --git a/application/ui/src/features/annotator/annotations/annotation-labels.component.tsx b/application/ui/src/features/annotator/annotations/annotation-labels.component.tsx
index f1976ae969..e4a5b20e37 100644
--- a/application/ui/src/features/annotator/annotations/annotation-labels.component.tsx
+++ b/application/ui/src/features/annotator/annotations/annotation-labels.component.tsx
@@ -3,6 +3,7 @@
 
 import { PointerEvent, useCallback } from 'react';
 
+import { isEmpty } from 'lodash-es';
 import { useZoom } from 'src/components/zoom/zoom.provider';
 import { v4 as uuid } from 'uuid';
 
@@ -85,8 +86,15 @@ export const AnnotationLabels = ({ labels, onRemove }: AnnotationLabelsProps) =>
                     fill={placeholderLabel.color}
                     stroke='none'
                     rx={styles.borderRadius}
+                    aria-label={`label ${placeholderLabel.name} background`}
                 />
-                <text x={padding} y={yOffset + styles.textYOffset} fontSize={fontSize} fill='#fff'>
+                <text
+                    x={padding}
+                    y={yOffset + styles.textYOffset}
+                    fontSize={fontSize}
+                    fill='#fff'
+                    aria-label={`label ${placeholderLabel.name}`}
+                >
                     {placeholderLabel.name}
                 </text>
             </g>
@@ -94,7 +102,7 @@ export const AnnotationLabels = ({ labels, onRemove }: AnnotationLabelsProps) =>
     }
 
     return labels.map((label) => {
-        const labelWidth = calculateLabelWidth(label.name) + closeButtonWidth;
+        const labelWidth = !isEmpty(label.name) ? calculateLabelWidth(label.name) + closeButtonWidth : 0;
         const xOffset = fullLengthOfAllLabels;
 
         fullLengthOfAllLabels += labelWidth + gap;
@@ -110,12 +118,19 @@ export const AnnotationLabels = ({ labels, onRemove }: AnnotationLabelsProps) =>
                     fill={label.color}
                     stroke='none'
                     rx={styles.borderRadius}
+                    aria-label={`label ${label.name} background`}
                 />
-                <text x={xOffset + padding} y={yOffset + styles.textYOffset} fontSize={fontSize} fill='#fff'>
+                <text
+                    x={xOffset + padding}
+                    y={yOffset + styles.textYOffset}
+                    fontSize={fontSize}
+                    fill='#fff'
+                    aria-label={`label ${label.name}`}
+                >
                     {label.name}
                 </text>
 
-                {/* Close button */}
+                {/* Remove button */}
                 <g style={{ cursor: 'pointer', pointerEvents: 'auto' }} onPointerDown={onDeleteLabel(label.id)}>
                     <rect
                         x={xOffset + labelWidth - closeButtonWidth}
@@ -129,6 +144,7 @@ export const AnnotationLabels = ({ labels, onRemove }: AnnotationLabelsProps) =>
                         y={yOffset + styles.textYOffset}
                         fontSize={fontSize}
                         fill='#fff'
+                        aria-label={`Remove ${label.name}`}
                     >
                         x
                     </text>