Avoiding confrontation will make a difficult situation worse. It's time to address the elephant in the room. A colleague's toxic behaviour has been affecting the entire group. Even the best performers aren't able to work well because of this pest's negative influence. If you're not willing to dismiss the troublemaker, give them a stern warning. Inform them that they will be fired if they continue being offensive. It's up to you to set and maintain a high standard. Turning a blind eye will cause anger and resentment.