YEP!
Oily swarf will kill the shop vac. I regularly use on to vac out the intake valley and rocker galleries on engines after scraping gaskets and such so I have killed more than one. Not a worry since they are common "garage sale" commodities over here. The biggest problem is the oily mess that was left in the canister. If I needed to use the vac for wet service it took a lot of cleaning before I could even start the needed job so I ended up with two.
I built a "separator" like the ash collectors others have mentioned and am VERY happy with it. I am now down to one shop vac, saving some storage space. The one I built is simply a 5 gallon paint bucket (metal for fire proofing) and a few common hardware store PVC fittings. The trick for our needs as opposed to the swirling cyclones that wood workers use is that our swarf is considerably heavier and it drops into the bucket rather than being carried on to the vacuum source. With this in mind I simply made a baffle that made the air flow turn a 90* corner before turning a second 90* into the vac hose.
Cleaning the units is a a simple task of dumping the canisters into the trash. The "separator" catches all the oily swarf and the vac now has only the usual dust and stuff it was designed to collect.
My next mod will be to make some stand offs to mount the shop vac on top of the "separator" so as to reduce the foot print of both units and to allow me to simply switch out hoses as needed for the task at hand.
I saved the hose and tools from the discarded units and use those as dedicated "dirty work".
I got the idea from the wood dorkers and they pointed me to this site for more info.
http://www.cgallery.com/smf/index.php?board=1.0My total investment including the scrounged "fiver" and lid was around $10 USD.
Good luck with the project. Hope this helps.