I was trying to organize my Gmail chat contact list, I remember that previously there was a "More options" button and then it was replaced by a "Caret" icon which open a dropdown menu with the option for show/hide the contact. (Auto, Always show, Never show etc.)
What I have noticed now is that I don't have the "Caret" icon anymore, not sure what happened here.
This an image of how the overlay window for any of my contacts is shown now.
I am using Ubuntu-14.04.01 LTS + Firefox-34.0 or Chrome-39 and Hangouts as the chat app.
This question is very similar to: "Never Show" missing on some contacts in Gmail chat but the OP in that question never replied or added more information.