A method and apparatus for Ethernet data compression enables the size of Ethernet frames to be reduced. Compression and decompression of Ethernet frames occur by the Ethernet network elements, rather than by user computers or end devices that transmit data on the Ethernet network. A new EtherType value may be used to identify the type of compressed Ethernet frames and optionally the type of mechanism used to compress the payload of Ethernet frames. The new EtherType may be inserted into a newly assembled frame ahead of the original EtherType. Alternatively, the new EtherType may replace the original EtherType and a short subheader may be used to identify the original EtherType. Out-of-band network signaling by the Ethernet control plane may also be used to determine whether frames are to be compressed and decompressed over controlled Ethernet links and tunnels, with or without use of the new EtherType.