FileVault encrypts the full disk. The data is protected from those that don't have access to the computer, or if the device is removed it will be protected.
When someone with a valid login enters their correct password they basically "unlock" the disc. They have access to unencrypted files with the caveat that they have the correct permissions to access those files. Any program running on the Mac would also have unencrypted access to any files they have permissions to access.
When User1 launches Time Machine it backs up the entire disk with the exception of anything explicitly excluded from the backup. It is NOT encrypted by default just because you're using FileVault. In fact, the backup itself is not protected by FileVault. You must turn on the Time Machine encryption for the backup to be encrypted.
File permissions are still intact on the backup. Meaning you would not have any access you don't already have. Therefore User1 cannot access any files they don't already have access to (e.g. User2's files) and vice versa.
When you are logged in as User1 you will not have access to files that belong to User2 but you can restore files and folders from either account.
References
Time Machine Backup with Multiple User Accounts
Backup FileVault Encrypted Disks - Time Machine
With FileVault ON are Time Machine Backups Encrypted
