There are a number of legal myths in the car business, misconceptions that can lead to liability. Let's look at five of the most common.

Myth 1

Car dealers have a special exemption under the Fair Labor Standards Act, and need not pay employees in the sales department, service department and parts department time and a half overtime.

There are exemptions to premium overtime under the Fair Labor Standards Act specifically for car dealers. Sales people, mechanics, and parts people are exempt.

However, there are generally employees in those departments who do not necessarily meet the exemption qualifications. Consider whether each employee's job functions allow you to treat that person as exempt.

Myth 2

We received a 1-year term agreement from our manufacturer rather than the permanent agreement we deserve, and that will allow the manufacturer to refuse to renew us after one year, if it chooses.

A great myth of auto-dealer franchises is that term agreements give the manufacturer the right to refuse to renew a dealer.

All states have laws providing that a franchisor cannot terminate or fail to renew a dealer without special circumstances under state statute.

A manufacturer cannot refuse to renew you simply because of the duration of your agreement. But what you agree to may negatively affect your rights. So negotiate non-standard provisions carefully.

Myth 3

The customer owes more on the trade than the car is worth, so we can raise the price of the car we are selling to adjust the trade allowance to cover the full amount of the payoff.

In fact, doing that violates the law, according to the Federal Reserve Board.

You must net the negative equity against the down payment, separately disclose the amount financed that is being used to pay the negative equity or do a combination of those two things. Otherwise, you risk a lawsuit.

Myth 4

To make sure of the identity of the person going on a test drive, I can run a credit report.

Sure, you must know who is taking one of your cars out for a test drive, so ask questions and get a picture ID. However, the Federal Trade Commission does not view a customer's test drive by itself as part of a credit transaction that gives you a reason to run a credit report without signed authorization.

Myth 5

We are suspicious about the money the customer is going to use to purchase a vehicle since everybody knows that he's a drug dealer, but we don't have to worry since he is giving us less than $10,000.

This is one of the most dangerous misconceptions in a dealership. There are actually two important federal laws designed to combat money laundering — cash reporting on an IRS Form 8300 and the anti-money laundering criminal statutes.

They impose separate and different obligations. A dealership must stop a transaction to avoid being engaged in money laundering if it knows or has reason to know the funds are from criminal activity, regardless of the form or amount of the funds.

A dealer must report receipt of cash (currency, money orders, travelers checks and cashier's checks with a face amount of $10,000 or less that are not the proceeds of a loan) in excess of $10,000. But there is no reason to halt a deal involving reportable cash, unless the customer is engaged in money laundering.

When training personnel, always distinguish between the obligation to report cash in excess of $10,000 and the obligation to prevent money laundering involving funds that dealership staffers know or should know come from criminal activity.

Attorney Michael Charapp is co-author of a new book, “Auto Dealer Law: The Definitive Legal Guide to the Purchase, Sale and Operation of Vehicle Dealerships.” It is available at Contact him at (703) 564-0220 and