My users share a single Axcrypt password to open up the files.
You cannot use AxCrypt like this unless you’re happy sharing the single master password with everybody.
Is it possible using settings to make sure that the temporary unencrypted file is created on the user’s local PC so that it is never on Google drive in clear?
You would need to write a script yourself to achieve this. It’s not something that AxCrypt supports.
You might want to ask Google to introduce an option to upload only specific user-designated file extensions (e.g. .AXX). This would solve your problem.