Thanks for modifying the live example. The problem is that the gizmo is part of the scene and thus will be affected by OutlinePass. Since both OutlinePass and TransformControls control the visibility of this element, things start to interfere.
You can mitigate this issue by using a custom version of OutlinePass where the visibility is controlled via THREE.Layers (see OutlinePass for child meshes). However, this approach breaks if you are going to use layers on app-level.
Updated fiddle with new OutlinePass: https://jsfiddle.net/o2ehts7L/2/