It lets the quad know when the clutch is pulled or not. I unplugged mine because it supposedly removes the speed limiter that the quad has programmed in. I haven't noticed much difference.
With the switch unplugged, the quad can jump forward suddenly if you don't remember to pull the clutch when it is in gear and you try to start it. The switch would normally tell the machine not to start when it is in gear and the clutch isn't pulled.