Mr Shapps said a majority Conservative government would make it easier for firms to sack staff if it "hasn't worked out" without the stigma of firing them or the need to make a post redundant.
Setting out the Tory plans for the 2015 election, he said: "In the next Conservative manifesto you will see an attempt to make employment law reflect the realities of modern Britain and proper business rather than a fantasy world where you only have two options and both are completely inadequate for both the employee and the firm."
Drawing on his own experience of employment laws, Mr Shapps said: "I started a printing company 23 years ago, it still runs to this day, and we always sat there and wondered how it is that when you know that somebody is not working out right for the company, they are just not fitting in to that role, you have to effectively end up coming up with disingenuous reasons why you need to change that role.
"That means there are only two ways of dealing with wanting to bring a contract to an end. You either have to pretend the role has gone, or you have to fire the person.
"That is crazy, it doesn't stack up to what really happens out there in the real world. In the real world it can just be that the two of you weren't quite a fit, it just didn't work out.
"It's not something that should be a slur and a bad record on that employee's report and it isn't something that should force a company to have to reorganise a department even though they are perfectly happy with the job descriptions in each department.
"We should be honest about this, we should as a country say there should be a way of saying to people 'thank you very much, it hasn't worked out but here's a decent package for you to move on from this role and the support you need to gain another job' so it's not a hire and fire thing either.
"Those are the sorts of changes the Conservatives would like to see that have not been able to introduce in this parliament because of the coalition."
He added: "I'm not in favour of an insecure workforce, I don't think that's a good thing or healthy for the country. I am in favour of making sure that businesses can flourish and we have to have more honesty in employment law in order to get that."
Mr Shapps faced questions about employment terms following criticism of zero hour contracts by Deputy Prime Minister Nick Clegg.
The Tory chairman did not directly respond, but said: "I do think, as a broader generalisation, that it is the case that we should have employment laws that reflect modern work practices, (and) support employees and employers."
Asked about the issue at a Westminster press conference, Mr Clegg said Vince Cable's Business Department was examining the contracts.
He said: "We do need to look at the effects of zero hour contracts.
"I am a huge advocate of flexibility in the British labour market. It is one of the reasons why we haven't suffered the spike in adult unemployment that we've seen in other developed economies which have had to deal with the consequences of the 2008 crash. I do want to protect employers' rights to employ people flexibly.
"But there has to be a balance. There can be a really worrying level of insecurity if you are an individual employed on a zero-hour contract, where you are told by your employer you will be given a timesheet by Wednesday on how many hours you will work next week and actually you don't get it until Sunday evening, and you then go in to work from 7.30am to 7.30pm and only get paid for five hours.
"For people, particularly with families, who have got to pay bills and have to got to plan - everybody has to plan for what their income is and what they have to pay out - that can cause very intense anxiety and insecurity indeed.
"I want to look at this carefully, but I know that the Business Department is looking at this over the summer to see whether we need to make any adjustments or not. I'm not going to second-guess that process... but I'm very interested in seeing what evidence they come up with."
Mr Clegg added: "We need to get the right balance between flexibility in the labour market, but not at the cost of what I would suggest are unacceptable levels of individual insecurity."
TUC general secretary Frances O'Grady said: "People at work should be very afraid. Rather than bearing down on workplace abuses like the misuse of zero-hours contracts, Mr Shapps reveals that the priority for a Conservative government would be to make it even easier to sack employees.
"Already people have to wait two years - a one year increase - to get protection against unfair dismissal. This adds up to scrapping all protection."
Shadow business minister Ian Murray said: "Grant Shapps appears to be admitting that he has broken the law by making up 'disingenuous reasons' to sack his own employees.
"The Government should be making it easier to hire people, not easier to fire people - but now the Tory Chairman is raising serious questions about his own record as an employer. He needs to come clean and clarify exactly what he meant by these comments.
"If the only solution the Tories have for sorting out their economic mess is illegally firing workers it's no wonder people think they're out of touch."