Robert,
Unfotunatley it is unless I have made a typo in all the various attemps I have made. I basically have various "label layers" which I don't want to appear in the legend at all. These are duplicate layers of the respective line work layer. e.g. rail linework for example with no colour set for the line and dynamic labelling switched on.
My set up uses multiple layerlist xml files using a single instance of layerlistwidget (the exclude layer in the respective xml files for this widget works). The dynamic layer list widget is behaving correctly in this set up, except for the exlude layers part.
A bit of a puzzle