The Castleton Group, which shut down last month, was operating as a professional employer organization -- even accepting new clients -- though it wasn't licensed.

The Raleigh company was able to do that because it had operated as a PEO before the enactment of a 2005 law that required PEOs to be licensed.

Under that state law, Castleton was permitted to continue operating as long as it was pursuing a license. That pursuit included its legal appeal of the Insurance Department's decision to deny Castleton a license.

Some former Castleton clients insist that the Department of Insurance fell down on the job for failing to notify Castleton clients about the company's problems. The Insurance Department position is that it went public as soon as it could -- when it denied Castleton's license in early December.

Insurance Department spokeswoman Chrissy Pearson said no other PEOs are in the situation Castleton was: operating as a PEO in North Carolina without being approved by regulators.

But it's still important to do your homework before hiring one. PEOs provide vital services such as payroll and health insurance to small and midsize businesses, so businesses must make sure the company they hire is financially sound and a good fit for their organization.

Here are some questions to ask and things to check.

* Is the PEO accredited by the Employer Services Assurance Corp.? This nonprofit group, better known as ESAC, has tough financial standards, one reason only 25 of the nation's more than 700 PEOs are accredited. Nine in North Carolina are.

Accredited companies must meet operational and ethical standards and are backed by $6 million in performance bonds. That money is available to reimburse clients, their employees and tax authorities if the PEO defaults on obligations.

* Is it licensed by the state?

Companies can be denied licenses for failing to meeting the state's financial standards.

The Insurance Department's Web site lists the 90 companies licensed to do business in the state. Its "listing of active PEOs" is accessible at www.ncdoi.com/FED/SE/ fed_se_home.asp.

If a company isn't on the list, it can't accept new clients. However, more than 40 companies that don't have an office in North Carolina and aren't on the list are authorized by the state to work with existing clients. If your PEO isn't on the state's list of licensed companies and you want to check whether it falls into this category, you can contact the Insurance Department at (800) 546-5664.

* Ask to see an audit.

To get a state license, a PEO must provide the Insurance Department with an independent audit of its finances. You should be able to get an audit from the company, or you can request it from the Insurance Department.

* Find out whether a PEO's health insurance plan is self-funded or if it's providing insurance underwritten by a licensed insurer. The distinction is important.

Licensed insurance companies are required by the state to pay into a fund that can be used to pay claims if the insurer becomes insolvent; self-insured companies face no such requirement.

The vast majority of PEOs don't have self-funded health insurance plans, said Ron Ennis, an Insurance Department manager.

More tips on selecting a PEO can be found at the National Association of PEO's Web site, www.napeo.org.

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