Usually the employees are written in the budget as employees, and that would preclude them from being contractors. You can hire part time help using the award as long as contracted services are written into the budget as well.
For an SBIR Phase I, at least 2/3 (66.67) of the research will need to be performed by the small business concern.
My apologies if my last message created any confusion. Any employees written into the grant may be part-time W2 or full time W2 without issue. Usually the word employee would imply W2, and 1099 would imply contractors. Alas, a part-time employee can be 1099, but most federal agencies would prefer to see W2 for employees.