Q: Watch doesn't unlock MAC!

Hi I have read many posts regarding this issue, but my issue appears to be quite unique.

Here's the scenario - If my watch is connected to my iPhone 7 Plus (bluetooth enabled on iPhone), my MacBook Air prompts me for the password. However, if my phone is either switched off or I disable bluetooth, unlock with watch works on the MacBook Air.........I have searched everywhere, reset, rebooted etc but still no luck

Any recommendations?

Thanks