The 34-year-old former Brumbies loose forward will join new head coach Dan McKellar at the Waratahs, who finished dead last in Super Rugby Pacific.
Former England international Mike Catt has inked a three-year deal with the Waratahs and is charged with guiding the attack, and former Wallabies prop Dan Palmer is the new set-piece coach.
McCaffrey is responsible for the defence.
He has only recently joined Otago, who get their NPC season campaign under way against Southland in Invercargill on Saturday.
While with Otago, he will be working with a whole swag of Highlanders. Next year, he will be actively working against them.
Otago Rugby Football Union chief executive Richard Kinley said those sorts of conflicts of interest were par for the course in the modern rugby landscape.
"[It’s] all OK with me — a great opportunity for him to progress," Kinley said in an email response.
"Possibly coming here has added to his CV.
"Coaching is a career pathway like any profession and with the limited number of teams in Australia and New Zealand to move to, it is reasonably likely that coaches will coach teams that play against other players/teams they have been involved with.
"I can think of a few coaches that have ended up in similar positions."
Highlanders chief executive Roger Clark could not be reached for comment.
Kinley was keeping tight-lipped on whether Otago had signed an outside back for the NPC.
He has previously stated the team was in the market for a specialist winger to bolster a shortfall in the area.
"As we spoke about previously, we acknowledged we had a spot in the squad and while wanting to pick locally we’re exploring all options.
"You will have seen that we have assembled local players into the squad for an opportunity to date and this is still our approach at the present time."
Ollie Sapsford, the Brumbies winger who is rumoured to be joining Otago, is listed as unavailable for Hawke’s Bay this season.
