Hiring someone as an employee AND contractor

In the US this would seem like a way to avoid mandatory overtime pay. If this employee is paid hourly, then my guess is you will run into problems. You should contact a labor expert to make sure.

Your downside is that years from now the employee could complain to his state labor compliance board and claim mandatory time and a half pay for all hours worked over 40 per week.

First off, this happens all the time in the US, which of course does not necessary make it correct.

I you hire someone to come in and clean, either an employee or a stranger, be careful that they are not acting as an employee under the IRS rules. The key test is not how you pay them, but rather the nature of the engagement.

If you provide the tools (mop, broom etc.), place where the work is done (your office), define the manner in which the work will be done, prescribe when it will be done, who will do it etc. you are defining a job that is dangerously close to being classified as an employee.

See the IRS page Independent Contractor (Self-Employed) or Employee?

Some key conditions which might make it OK include:

1) Your employee runs a cleaning business and has many other customers. 2) Your employee sends in someone other than themselves that work for the cleaning business to clean your office. 3) Your employee's cleaning business provides their own supplies and tools. 4) Your employee has all the proper business licenses and insurance. 5) Your employee files and pays all the appropriate taxes for their cleaning business.

Ye Standard Disclaimer: IANAL

I don't see any reason that this cannot happen unless you have a contract with the employee that doesn't allow them to be on board or owner of any other companies in this case you might want to consult an actual bona fide lawyer on whether you can hire a company where your employee is an owner, there are all those perceptions of impropriety things.

Save that more power to them and you and let them earn extra.

P.S. Consider the implication of potentially having to fire that employee.

You have not mentioned where you are located. But I would say this differs from country to country and you might want to ask your local tax guru or your law hero. In germany this is probably not going to fly. If your are self employed you need to prove your independence from your customers (if interested, the german term is "Scheinselbstständigkeit"). Of course, I am not sure about the exact regulations, but want to show up that you really need to ask one of the mentioned guys.