When Capital Investment Cos. needed a new human resources management firm last month, it considered only large, publicly traded companies that it knew were financially sound.

The Raleigh financial services and brokerage firm wanted to make sure its new HR management company wouldn't leave it in the lurch in the face of financial problems. That's happened when the previous company it had hired, The Castleton Group, abruptly shut down in December.

"They're dealing with my lifeblood -- my employees," Capital Investment CEO Richard Bryant said.

Businesses such as Castleton -- professional employer organizations, or PEOs -- enable companies to hire someone else to perform human-resources functions such as payroll and health insurance.

The PEO industry is relatively young -- it started in the 1980s -- but it has seen robust growth. Last year, the industry grew 15 percent, the National Association of PEOs estimates. The 700-plus PEOs nationwide provide HR services to about 2 million workers.

The collapse of a PEO such as Castleton is rare but not unheard of, experts say. In most cases, the company is acquired or arranges for an orderly transfer of its clients to another PEO.

In 2006, the state Department of Insurance denied the operating licenses to two PEOs that did not meet state financial standards. Those PEOs, which began operating before the state started requiring licenses in 2005, phased out their operations so that clients had sufficient time to shift to other PEOs, Insurance Department spokeswoman Chrissy Pearson said.

But that's not what happened with Castleton. Instead, Castleton went to court to fight the denial of its license last month, then stunned its clients by reversing course and shutting down.

It was a worst-case scenario, especially for clients that had the misfortune of relying on Castleton for health insurance.

That included companies such as Morrisville's XS Inc., a 30-employee company that provides software for the agricultural industry; Family Medical Supply in Dunn, which has more than 100 workers focused on providing home medical equipment and supplies; and Auto Shape Collision Center, which employs 17 at two body shops in Raleigh and Durham.

Those companies, working on short notice, lined up new health insurance coverage that took effect at the beginning of January. But Castleton's coverage expired Dec. 20 -- even though clients and employees had paid their premiums a month in advance -- leaving a gap in coverage that lasted more than 10 days.

Two employees at Auto Shape were so upset by the temporary loss of health insurance coverage that they quit.

"I will never get those people back," said Henry Van Pala, co-owner of the business. "It's extremely hard to get good people in this business."

Thad Armbruster, chief financial officer at XS, is worried about health insurance and other issues, too. He said Castleton didn't deposit money from employees' last two paychecks that had been earmarked for 401(k) plans. He plans to take legal action -- though he's not sure what form it will take.

"We intend to be made whole at the end of the day," Armbruster said.

Capital Investment's Bryant is using the demise of Castleton as a springboard to switch to a new category of company, an administrative services organization, or ASO.

PEOs have an unusual structure. Under their contracts with clients, they actually become a co-employer of the clients' workers. ASOs offer HR services similar to PEOs but aren't co-employers.

Although workers remain the employees of the PEO and the company that hired it, it's an arrangement that irks some companies.

With a PEO, Bryant said, "it seemed like they weren't my employees anymore."

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