There are three honest reasons to use a professional employer organization, and one of them accounts for most decisions. Being clear about which applies to you decides whether the arrangement is good value or an expensive way to solve a problem you could have solved otherwise.
Benefits, which is the reason most of the time
A small employer cannot negotiate group health rates across a large pool, and a PEO can. If your cover is expensive or thin and that is costing you people, this is the argument, and it is a strong one. It is also the only one of the three that cannot be bought more cheaply another way, which is why it should be the first thing you price.
Risk transfer, which is real but narrower
Employment tax filing, workers' compensation and the paperwork that carries penalties can be moved to a provider, and with a certified organization the federal employment tax liability moves too. For an employer with difficult workers' compensation classifications or a poor claims history, access to a large program can be the whole value. For a low-risk office employer it is worth less than the pitch implies.
When it is the wrong tool
If your problem is simply that payroll takes too long, a payroll platform with a published price will fix it for a fraction of the cost. If you are growing fast with well-paid staff, percentage-based fees scale against you exactly as the alternative gets cheaper. And if you value owning your own handbook, systems and employment relationship, the arrangement will chafe in ways no fee comparison shows.
Other questions people ask
Why do companies use a PEO?
Most often for benefits: access to group cover negotiated across a large pool, which a small employer cannot assemble alone. Risk transfer on filings and workers' compensation is the second reason, and administrative relief the third.
When should I not use a PEO?
When the problem is only that payroll is time-consuming, because a published-price platform is far cheaper; when your team is small and well paid and the fee is a percentage of payroll; and when you want to keep your own handbook, systems and benefits.
Is a PEO cheaper than doing it yourself?
Rarely on administration alone. It can be cheaper overall if the benefits or workers' compensation access is materially better than what you can buy on your own account, which is why those are the numbers to compare first.