I had the same problem. i ended up deleting the profiles installed for my work access and resetting the watch as new. I was able to set up a passcode then. After that, I reinstalled the profiles. In hindsight, perhaps I should have tried setting up the passcode on then phone after deleting the profiles, without resetting the watch. But at that point, I'd reset the watch a few times already, so I was pretty good at it ...
I have an open case with Apple support on this, need to let them know that this worked. I was on the phone with them for quite a while but didn't have time then to remove the profiles to see if that worked.