Apple watch getting unlocked along with iPhoneSolved

We had a slightly similar problem, we recently added a password policy on our iPhones but now only when we unlock our iPhone, the Apple Watch is also getting unlocked.

@Lennon, @Aika, It seems like you might have a password restriction configured on your devices that requires the passcode on your iPhone to contain letters or special characters. In which case, Apple will lock the settings ‘Unlock with iPhone’ for your paired Apple Watch on the iPhone, and the Apple Watch cannot be used effectively to unlock the iPhone. The passcode on the Apple Watch can only be set as a simple numeric password, and you can use Apple Watch to unlock a paired iPhone. However, if your iPhone is secured with a more sophisticated password, it won’t make much sense to unlock it with the Apple Watch secured with a numeric password. So, this workflow is agreeable only when the password on the iPhone is also numeric.

To restore the settings on your Apple Watch, you might have to disassociate the passcode policy from the iPhone (or set up a simpler requirement i.e., numeric passcode). Unfortunately, this is the default flow with Apple and the only workaround I can suggest to you at this moment.

Cheers!
Zach Goodman
Hexnode UEM

the issue is resolved when we disassociate with the policy with the password policy. However, this is not a very favorable method for us and I hope we get a fix for this soon. Thanks for the explanation @Zac.