See clip from Attorney Rajiv S. Khanna's conference call video that addresses this question.
A TN can be set up in one of the two ways. Either a US employer directly offers employment to a professional from Canada or Mexico, and they come in as a Treaty National. So direct employment, simplest case W2. They are a full employee of the company, US employer, so that part is easy to understand.
The second way to set up a TN if for e.g. there is a company in Canada, there is a company in USA, the company in USA contracts with the company in Canada, and it says you send employee xyz to us to work, and we will pay you and you pay the employees the salary. In that case the US company is sending out a 1099 to the Canadian company. Another easy one to understand.
Problematic cases are those were the Canadian worker is being sponsored by the US company and the US company wants to put them on a 1099. I think that is not a good idea. Lot of employers have said as long as employer employee relationship exists you can file a 1099 and that to me is a little short-sighted. Reason being because the difference between an independent contractor and an employee is the degree of control. If you are maintaining control as an employer, then IRS could get you in trouble. IRS could say you should be putting this person on W2, deducting their social security taxes, other benefits, you have to put them on W2, you can’t have them on 1099. So remember you have to balance control under immigration law, with control under taxation laws otherwise you could get into a lot of trouble.
Short answer I don’t know how you can comply with US laws when a TN worker works on a 1099 on a US sponsored job.