First, you must be connected to your router via 2.4ghz, and not 5ghz. Some people say you can use 5ghz Afterwards (for iPhone only, watch does not support 5ghz) , but for this explanation we'll leave that out.
Once your iPhone is connected to the router via 2.4ghz connection, it will share the connection details with your watch. If you are ever out of Bluetooth range of your phone, the watch will connect to your phone via wifi. As long as it has a Bluetooth connection, it will not use wifi to save battery power.