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Late one afternoon, after the phones stopped ringing, the owners of Hose & Accessory Sales Inc. called the company's seven workers into the sales office to explain that, soon, they'd all have a new employer.

"I was concerned that I would actually be going to work for another company, that my boss was no longer going to be my boss, that some of the advantages I had after working there for eight years would be gone," said Marvin Hopkins, sales manager at the Houston- based company.

As it turned out, Hopkins and his co-workers weren't actually going to work for someone new. Instead of losing one boss they were gaining another -- what the industry likes to call a "co-employer" -- responsible for signing their paychecks, administering their benefits and handling most other personnel issues.

The arrangement may sound arcane. But it is becoming much more common, as smaller businesses faced with rising benefit costs and complex regulations turn employment responsibilities over to specialists.

Between 2.5 million and 3 million workers are now on the payrolls of such companies, known as professional employer organizations, or PEOs, the industry estimates.

Total revenues for PEOs -- which include the salaries and wages that flow through them to workers -- have increased from $13.6 billion in 1995 to a projected $45.4 billion this year, according to Staffing Industry Analysts Inc., which tracks the business.

But the rapid growth of PEOs and similar firms in the past few years raises complex questions about changing workplace relationships and responsibilities that once seemed straightforward.

Chief among the questions: Just who is the real employer here?

"It doesn't merely beg it (the question). It screams it out very loudly," said S. Derrin Watson, a Santa Barbara, Calif. legal consultant who specializes in the issues surrounding employer responsibility for retirement plans.

The answer, while not yet legally clear, is critical. The real employer is held responsible for such job issues as worksite safety, withholding taxes, paying unemployment insurance, maintaining retirement programs and offering health insurance.

The standard for determining employer status varies, depending on the issue in question. But PEOs have had some trouble making a case that they should sometimes be considered the employer.

A decision last month by the Internal Revenue Service regarding the way PEOs run 401(k) and other retirement plans may help to clarify the matter. But after several years of lobbying various branches of the federal government, PEOs are still trying to convince lawmakers that they are sometimes entitled to wear the employer's cap.

Even without clarification, PEO executives say, the notion of co- employment will continue to spread as companies, particularly smaller businesses overwhelmed with the headaches and expense of being employers, turn that job over to outside specialists.

"We become their HR department," said Paul J. Sarvadi, president and chief executive of Houston-based Administaff Inc., the nation's largest PEO in terms of revenue. "All of a sudden the employee has...the best of both worlds because they have the benefits and advantages of a Fortune 500 company and the working advantages of a small business."

But critics, including labor groups, say PEOs are just a fancy strategy some employers seize on to duck their responsibilities to workers.

"There's no way that the PEO is the real employer of any of these employees," said David West, executive director of the Center for a Changing Workforce, a Seattle group opposed to the practice. "That's really the question -- to what degree are employers looking at PEOs as a way to avoid paying benefits?"

While PEOs have come into their own in the last few years, they aren't really new. Instead, they're a descendant of what began as employee leasing, intertwined with the outsourcing trend that has swept business in recent years.

Leasing dates to the 1970s, when doctors were among the first to try it. Some physicians wanted to set up lucrative retirement plans for themselves without making those benefits available to their employees.

The physicians signed contracts with leasing firms, shifted their employees to the payroll of those firms and "leased" them back, technically turning their practices into one-person businesses.

The strategy didn't fly, since retirement tax law sets standards for determining who an employer is, and generally requires companies to offer the same retirement programs to all their employees.

But employers and staffing firms have tried numerous variations of the formula in the years since, in efforts to contain costs, ensure maximum flexibility and keep their ranks filled.

In recent years, courts have ruled against some variations of the leasing arrangements.

A case now before the California Supreme Court pits workers against the Metropolitan Water District of Southern California, the public authority responsible for water supply to the region. Many of those workers were recruited by and hired through staffing agencies, which issued their paychecks and offered them a 401(k) plan.

The workers, told they were coming on board for temporary jobs, sued and claimed that they were really permanent workers employed by the water agency, entitling them to the same retirement benefits due regular MWD employees.

"The agency we went through had no control over the way we worked, the hours we kept, the jobs we did, or the tools that we used," said Dewayne Cargill, a "temporary" project manager for more than eight years at MWD who led the lawsuit.

"You would move around the district and you would never know if another employee around you was `temporary'. It was just that supervision treated you differently."

The workers' lawsuit has won in two lower courts, but is being appealed.

Critics of such staffing arrangements say they are essentially the same as PEOs. But the PEO industry and some experts say there is an important difference.

While some shady operators remain in the staffing business, most PEOs are set up not as a way for employers to dodge responsibility for workers, but to share it, said Bruce Steinberg, senior editor of Staffing Industry Report, a trade magazine.

They do that by allowing businesses to outsource human resources operations, freeing managers to focus on running the business without getting bogged down in personnel issues.

Employers contracting with PEOs "are not doing it to shirk any responsibility. They're doing it to put the responsibility onto somebody else, to have an expert do it, to have a professional employer do it," Steinberg said.

That's essentially what happened at Hose & Accessory Sales, which signed up with Administaff in 1995. The company, which handles marketing and sales of industrial hose on behalf of manufacturers, began looking into PEOs after the costs of an employee's drug rehabilitation threatened a big jump in insurance costs, said Bob Warnsman, one of the owners.

Signing up with the PEO allowed the company to buy insurance as part of the bigger company's pool, keeping costs in line. Hose & Accessory, which had been paying about $25,000 a year for benefits, saw its costs rise by about $3,500, he said.

In addition to insurance, Administaff took over payroll, retirement benefits, workman's compensation and other concerns.

"It didn't take long before I realized that it wasn't necessarily a bad thing, and it turned out it's really been good," said Hopkins. He cites pluses like access to Administaff's employee credit union, which gave him a low-interest loan to buy a car.

"We're delivering a product to an owner who says `I value our employees,'" said Lou Basso, president of The Alcott Group, a Farmingdale, N.Y.-based PEO.

Hopkins lists Administaff as his employer on tax returns, but when friends or business associates ask, he still says he works for Hose & Accessory Sales.

If only it were always so simple. The recent IRS ruling, while clearing PEOs of problems in the way they may have run retirement programs for workers in the past, does not settle when, where and if they can and should be considered employers.

That would probably require a change in federal law, but there is division in the industry on just how far that should go. If an employer goes under, the two sides argue, should a PEO be on the hook to pay lost wages to workers and taxes to the federal government?

The reality is that companies signing up with PEOs maintain so much control over their workers it is difficult for the staffing firms to makes a case that they are employer, consultant Watson said.