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Unlock with Watch was working really well for me at first, but it seems like the most recent updates (14.6 on my phone, whatever it was on Watch) messed it up. Restarting both didn’t seem to work, so I’ll try turning the setting off and back on, see if that helps reset it.
 
It is not “nonsense.” It is exactly how it is supposed to work, and it has already been explained both in this thread and by Apple.

Every time you put on a mask, you will see that screen the first time. You have to type in your iPhone passcode once. Then all subsequent unlocks will go through your AppleWatch.
Would you be able to reference where exactly it says by Apple that you have to enter the passcode on your iPhone to unlock with Watch while wearing the mask, even if your watch is on your wrist, passcode-protected and unlocked? I’ve spent time looking on their support site and I can’t find anything backing up what you said.
 
The last iOS update mentioned a fix for this but I keep having issues. It‘s annoying since this feature is really neat with a mask on.
 
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